Published: 14th January 2021
The Coronavirus Business Interruption Loan Scheme, or CBILS, has offered a valuable source of emergency finance for businesses during the coronavirus pandemic. Backed 80% by the government, the funding is provided by accredited lenders to businesses with a turnover of less than £45 million.
But what happens to a CBILS loan if the company has to enter administration or liquidation? With so many businesses experiencing continued trading and financial disruption due to Covid-19, is it still repayable or can it be written off with other unpaid debts?
CBILS loans are backed 80% by the government, who also pay the loan interest for the first 12 months. When the scheme was first launched by the Chancellor, it did receive some criticism due to the length of time it took to sanction a loan, and the fact that some lenders demanded personal guarantees from directors.
Security and/or personal guarantees are not required for loans under £250,000. For loans over £250,000, lenders may demand a guarantee but it cannot be secured on a director’s Principal Private Residence, and is limited to 20% of the debt.
For the largest loans, it’s likely the lender would require a debenture being granted - this would provide the bank with the ability to appoint an administrator if they were concerned regarding the viability of the business.
Although CBILS loans have been instrumental in helping small and medium sized businesses survive the economic shock of coronavirus, the pandemic has created such financial difficulty for many businesses that administration or liquidation have been their only option.
So what happens to a CBILS loan if a company enters insolvency and has to go into administration or liquidation?
The administration of the Company will crystallise the balance owed on the CBILS and this will become a provable debt in the administration and any security/personal guarantees in place will be activated accordingly.
Other options may be available regarding the future of the company. Unsecured loans can be included within a Company Voluntary Arrangement (CVA), whereby a single affordable monthly amount is negotiated by the administrator. This may include the CBILS loan and ensure more affordable terms can be arranged.
A sale of the business is also a possibility depending on the administrator’s assessment of the company and its suitability for this process.
If the company is no longer viable, however, liquidation may be the only outcome.
Any debts that remain unpaid after the sale of assets and distribution of funds in liquidation are written off prior to the company closing down. What happens to a CBILS loan during liquidation largely depends on whether security or a personal guarantee was provided when the loan was taken out.
As we mentioned earlier, CBILS loans under £250,000 don’t require security or a guarantee, but some lenders still seek guarantees despite the government amendments to the loan scheme as a whole.
If you’ve provided security or a personal guarantee for a CBILS loan, you need to carefully check the terms agreed. Your lender may have made a demand that’s not in line with government guidelines for the loan scheme, in which case you could potentially be personally liable for part of the loan.
If so, the lender is likely to call in the guarantee, and if you can’t afford to pay they may pursue you through the courts to enforce it. This could lead to significant financial problems on a personal level, alongside the loss of your company.
If you enter Creditors’ Voluntary Liquidation (CVL), it’s worth mentioning that you may be able to claim director redundancy pay. This could reduce the damaging effect of the failure of your company, and help you meet some of yours or your company’s financial liabilities.
Begbies Traynor Group is the UK’s leading business rescue and recovery specialist, and can provide the professional assistance you need. We’ll advise on what happens to your CBILS loan during liquidation or administration, and your personal risk of liability.
Please contact one of our partner-led team of licensed insolvency practitioners to find out more. We can arrange a free same-day consultation, and operate from a network of local offices throughout the country.