Repaying Bounce Back Loans on Company Closure

Due to widespread Covid-19 across the UK, the government announced an unprecedented support package to help small businesses in these challenging times. After the criticism of Coronavirus Business Interruption Loan Scheme (CBILS), the Bounce Back Loan Scheme (BBLS) was launched by the UK government as an alternative to help small businesses secure funding. Over £19 billion of loans have been granted up to 19 December 2020 to help SMEs.

The question is if you have received a loan as a small business owner, and your company is making losses, and you’ve decided to close the company - what will happen to the BounceBack loan? Whether you have to repay it? If yes, who will be responsible for repaying it?

In this blog, we cover what happens to the Bounce Back Loan when a company is placed into liquidation and can the directors be made personally liable for the loan.

• Bounce Back Loan
• What happens to a Bounce Back Loan in liquidation?
• Can you be made personally liable for Bounce Back Loan during company liquidation?
• What happens if you don’t pay back a Bounce Back Loan?
• What steps can you take to avoid personal liability for Bounce Back Loan?

Bounce Back Loan

Bounce Back Loan is a scheme launched by the UK government to help small and medium-sized businesses by offering them a government-backed loan between £2,000 and up to 25% of their turnover (maximum of £50,000). The main objective behind the scheme is to help small businesses survive the trading restrictions imposed due to Covid-19. Despite these measures, figures are quite disappointing, as a record number of businesses have been forced to close permanently leaving the BBLS outstanding.

What happens to a Bounce Back Loan in liquidation?

If you are a business owner and are adversely affected by the Coronavirus, and unable to pay your debts, you need to decide on the best course of action. In case you cannot pay your debts, you will be left with limited choices and may decide to close the business.

The creditor’s voluntary liquidation (CVL) process is usually used for closing companies with debts. As per this process, a liquidator (licensed insolvency practitioner) is appointed by the company to sell the business assets, repay creditors in the prescribed order and then close the company.

In case your company goes into liquidation, banks are usually secured and are first on the list of creditors who are repaid from the money generated after selling the company’s assets. In comparison to this, the case for Bounce Back Loan is different. The Bounce Back Loan becomes an unsecured debt when a company files for liquidation. This is because a Bounce Back Loan is not secured against the company assets but backed by the government, and the lender will be required to approach the government for full repayment.

Can you be made personally liable for Bounce Back Loan during company liquidation?

If the company cannot afford to repay a Bounce Back Loan at the time of liquidation or otherwise, in that case, you will normally not be held personally liable for the repayment of the loan. But it doesn’t mean that it will remain the same in all the cases. Personal liability issues may arise in the following two scenarios –

1. When the funds provided not used for the company benefit

   – If you’ve received a Bounce Back Loan, you need to adhere to the rules associated with it. As long as the fund provided meets the main objective of benefitting the company economically, directors can choose to use them, including company bills payment, paying staff and buying supplies. However, many rumours have been circulating that directors are taking inappropriate advantage and using the funds to buy personal assets, pay off personal debts and even invest in properties.

   In case your company enters into the procedure of formal insolvency, an insolvency practitioner will be appointed who will investigate why the company has become insolvent including the usage of the loans it has received. If after investigation; it is found that the loan has not been used in accordance with the terms, directors of the company will be held personally liable for loan repayment, which could put your personal assets like savings, property and vehicles at risk.

2. When to pay certain creditors ahead of others

   – If your business enters into a formal procedure of insolvency, every transaction made during the process will be examined by the liquidator. In case they find that the funds (BBL) provided are used to make payments to certain creditors and not others, you could be held responsible and personally liable for the payment value. You will also get examined by the appointed liquidator to as certain whether you should be disqualified from becoming a director in the future.

What happens if you don’t pay back a bounce back loan?

If you cannot pay back the Bounce Back Loan, your company may have already reached the insolvency level. Insolvency means that the key responsibilities of the director lie with the creditors and not with the shareholders, which means you can’t pay yourself, employees or any creditor based on your preference. Otherwise, it will be treated as wrongful trading on the part of the director, leading to a severe civil offence, ultimately making you personally liable as a director.

Also See: Member’s Voluntary Liquidation (MVL)

What steps can you take to avoid personal liability for Bounce back loan?

You can avoid the personal liability for Bounce Back Loan by adherence to the following –

1. If you have used the loan correctly but still unable to protect your company from liquidation, the debts of the company will be repaid from the sale of assets and rest of the debts will be written off.
2. The Insolvency practitioner will initiate an investigation, but if you have performed your duties as a director accurately and there was no misuse of the Bounce Back Loan, nobody can hold you personally liable, and there shouldn’t be further issues.

If you require any further guidance and tips on repaying Bounce Back Loans on Company Closure, Contact DNS Accountants on 03330886686, or you can also e-mail us at enquiry@dnsaccountants.co.uk

Also See: Is your Company ready for permanent work from home?

Also See: Complete guide on Directors Loans Accounts

About the author

Siddharth Agarwal
I am a Chartered Tax Advisor (OMB) and ACCA. I have 9+ years of experience in owner-managed business taxation issues, company reorganisations, property taxation, and succession planning. I also work with private clients on bespoke tax planning strategies for trusts, residence status, and non-residents. I aim to fulfil my professional duties towards my clients and keep them satisfied, my utmost priority. I believe in establishing and maintaining businesses and personal relationships as the key to mutual growth.