In March 2020 the government introduced the Coronavirus Business Interruption Loans (CBILS). Companies initially criticised the CBILS programme for it needing PG’s and not being appropriate for small businesses. In response, the Bounce Back Loan Scheme (BBLS) was introduced by the Chancellor in May 2020. BBLS was to assist businesses, especially small businesses, quickly access emergency funds between £2,000 and £50,000.
Repayment terms for Bounce Back Loans were originally for 6 years, but this was extended to 10 years. Interest rates fixed at a low of 2.5% with no repayments for the first 12 months. Despite this, many will still not be able to repay the debt.
But as we head into the 2nd national lockdown on 5 November 2020, the Bounce Back Loan or CBILS funds are likely to have been exhausted by most businesses. With no new schemes in sight, what can you do if you cannot repay the Bounce Back Loans?
This article focuses on what happens if a company and its directors cannot repay the money. Borrowings by a sole trader or partnership is entirely different and is covered in my alternative article here.
Is a personal guarantee necessary for a Bounce Back Loan?
In order to protect directors from being left personally liable in the event of a default, the government has prevented lenders from requesting personal guarantees. If the business struggles and is unable to repay the loan in the future, the liability to repay rests solely with the company.
Business lenders often request personal guarantees from one or more of the company directors for other loans before agreeing to lend. This places a personal risk to the directors and their own personal assets – including their home. Therefore the absence of a personal guarantee for Bounce Back Loans gives great protection to a company director. They are at first glance protected if a company cannot repay a bounce back loan.
But, there are instances where a director can be held personally liable for repayment of certain amounts. Understanding where this may happen is important.
Understanding Bounce Back Loans and director duties
A company director must act properly at all times. A director must use company resources to promote the success of the company, and not for personal means/gain.
Where this does not happen and a director acts unreasonably or irresponsibly, misfeasance may occur.
Misfeasance is where a director breaches their statutory and fiduciary duties. It can include purposely or willfully mishandling or misappropriating company funds. The absence of a personal guarantee can make no difference to the risk of personal liability. Proven misfeasance puts a director’s personal assets at risk, and may also result in them being disqualified as a director.
The rules around preferential payments, transactions at an undervalue, fraudulent trading, and misfeasance (for not acting properly) have always been in place. These are all set out under the Insolvency Act 1986.
Using Bounce Back Loan funds to refinance borrowing that a company has already taken may be ok. But, this is an area where professional advice should be sought. Great caution will be necessary in order to avoid breaching statutory and fiduciary director duties. Why not call Phil Ross on 07580 009 121 for advice.
Wrongful trading
As was known on 1 November 2020, the government temporarily eased wrongful trading laws to assist businesses
Facing financial difficulty continue to trade during these difficult times. But, these came back into full force on 1 October 2020, which meant that for those that hadn’t, but needed to then use the Bounce Back Loan funds, company directors and members of LLP’s needed to be extremely careful.
The law surrounding temporary suspension was however resurrected very shortly thereafter on 26 November 2020 and is now in place until 30 April 2021.
The strange period between the two suspensions actually provides a window of some 7 weeks where directors can be liable for what is known as wrongful trading.
Wrongful trading means that directors must not trade beyond the point of insolvency without taking appropriate measures to protect creditors from further losses.
However, even with the suspension of the wrongful trading provisions, directors are not entirely safe from criticism or liability if they do not act appropriately (for example in spending bounce back loan funds). Contact us if you are concerned about your solvency position
The risk of making a preferential payment with Bounce Back loans
One particular area for concern if a company cannot afford to repay the Bounce Back loan is preferential payments. Using the Bounce Back loan to repay borrowing with a personal guarantee attached, may be deemed a preferential payment.
Similarly, using the bounce back loan to repay personal borrowing previously lent to a company (e.g. from friends and family), may be deemed a preferential payment.
A liquidator or administrator will look to claim back these preferential payments.
False Declarations when applying for Bounce Back Loans
Another consideration should businesses be unable to repay their bounce back loan at any point is the declarations made during the application process. False declarations will void the terms and protections that the Bounce Back Scheme provides. Upon applying for the loan, business owners are required to formally declare that the Coronavirus Pandemic has negatively impacted their business and that they were not experiencing financial troubles prior to the end of 2019.
Whilst Bounce Back Loans have many clear benefits for providing the emergency funds required for struggling businesses. It is crucial that directors understand the finer details of these loans in varying circumstances. Understanding can assist directors in avoiding accidentally breaching their fiduciary duties.
So what can you do if you cannot repay the Bounce Back Loan?
- Don’t panic
- Contact Lucas Ross
Solutions include:
Alternative Finance
Cashflow Management
Moratorium
Company Voluntary Arrangement (CVA)
Administration
Liquidation
Alternative Finance
There are alternative options to Bounce Back Loans for small businesses, such as the Coronavirus Business Interruption Loan Scheme (CBILS), and alternative funding that uses business assets to generate cash. Please contact us for more help and advice.
Cashflow Management
If the problem is short term or it is the only the Bounce Back Loan or Coronavirus Business Interruption Loan you cannot repay then you do not need to panic. If your company is viable, you will be able to overcome this problem, you just need to manage your cashflow between now and when repayments start. We can assist you with this, we are experts at managing creditors expectations both informally and using some of the solutions below. But, if you are reading this article before March 2021 then chances are you don’t think you have a viable business.
Moratorium
The Corporate Insolvency & Governance Act 2020 introduced the new ‘Moratorium’, which provides a viable business with an invaluable breathing space to get out of its cashflow troubles. It can last for 12 months or much longer in the right circumstances.
CVA
A Company Voluntary Arrangement or CVA provides a company with an ability to totally reinvent itself whilst looking to trade out of its current difficulties whilst repaying some or all of its historic debts. It is a perfect solution for some businesses, but not for all.
Administration / Pre-pack Administration
Administration is designed to produce the best outcome for a business’ creditors and often involves a rescue of the whole or part of the business.
Liquidation
If the company is no longer viable however, and is insolvent, then the directors should look at placing the company into Liquidation to allow an orderly wind down to be conducted by the Liquidator. You can liquidate a company that has a bounce back loan
A Licensed Insolvency Practitioner is needed for the vast majority of the above and we have those in house. Kevin Lucas is one of our licensed insolvency practitioners so can easily help.
If you are concerned you cannot repay your bounce back loan and are worried about the potential consequences then email help@lucasross.co.uk or call him on 07580 009 121 for a free no obligation consultation. We have solutions to help you either repay this debt or deal with the situation where you can’t. Our bounce back loan debt specialists are here to help you.
