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I the first of these BBL articles we looked at your options if you are struggling to pay your Bounce Back Loan payments. If you haven’t read that article, it may be worth reading it now because we discuss the routes available to you via the ‘Pay as you Grow’ options. In this article, we want to focus on what happens if your financial situation has progressed to a critical stage. There is a lot of uncertainty and conflicting opinions so, we will try to answer the main points raised by the question ‘what happens if I can’t pay back my Bounce Back Loan’?
We have already seen business owners with BBLs who are unable to trade and sadly therefore, insolvent. It is also becoming clear from recent Government announcements, that it is prepared to act decisively in cases where BBLs were incorrectly obtained or the funds were incorrectly used. This announcement is bound to cause concern for anyone who is in a position of insolvency with a BBL.
So, where do things currently stand, and what is likely to happen if your business is insolvent with a Bounce Back Loan debt?
What happens to a BBL in a Liquidation?
If your company does go into Liquidation, then the BBL is treated as an unsecured debt. However, don’t let the BBL give you a false sense of security. It’s vital you check any other borrowings you may have to see what, if any, securities are in place because personal guarantees are often required for many sources of funding. A good place to start is to review your facility letter from your bank, which will list both the facilities and security. You need to know where you stand and where your BBL fits into the bigger financial picture.
Am I personally liable for the BBL if the Company is unable to pay it?
The common view is that these loans are guaranteed by the government and therefore there is no personal liability. For the most part this is correct.
However, there are some issues that directors need to be aware of.
· If the loan was incorrectly obtained you may have already breached the terms of the agreement. There were very few conditions around applying for the BBL but there were some declarations you needed to make and some conditions you and your business needed to meet. If you did not adhere to any of the following you need to be aware of it:
o You could only apply for 25% of your turnover in the year ended 31 December 2019 up to a maximum of £50,000. If you applied for more, it will likely raise questions during the insolvency process.
o You could only apply if the Company was a viable business on 31 December 2019. It could be that you will be required to prove the business was not insolvent at that point.
o The business (and any wider group of which it is part) should not have already been in the process of applying for or have already received a BBL. I have already seen examples of multiple loans being obtained.
o You could only use the loan only to provide economic benefit to the business and not for personal purposes. There is some confusion about what this means in relation to wages. You could use it to pay salary (including directors) but with some restrictions. Dividends should not have been paid from the BBL.
If you did not meet these conditions, your loan may have been obtained under false pretenses.
Next, you should be aware that in an insolvency process, the Insolvency Practitioner has a duty to review the director’s conduct. We have been informed by Government that we should review how the funds were used. Common problems will be:
o If the funds have been used to buy personal assets, for example, cars or property, then this will almost certainly be considered inappropriate, and action could be taken against the director. If you think you may have done this then you need to be aware of it going into the insolvency process.
o If the funds were used to pay one class of creditor in preference to another, for example, to repay a family loan whilst not paying HMRC, this, again, could give rise to a potential claim against the director.
If you obtained your loan correctly and used it appropriately then you should have no issue. Mistakes do occur though, and it is better for you to be fully informed as you head into any insolvency process.
The recent Government announcement will give new powers to the Insolvency Service allowing them to review the conduct of directors in cases where there is no formal insolvency. This is to close a loophole whereby directors apply to have the company struck off. Once this is done they can leave behind, BBL’s, employees, and other creditors. Under the new rules, the Government will be able to disqualify directors for up to 15 years if they do this. It should also be noted that these rules are also retrospective so to cover strike-off that has already occurred.
Call us immediately, if you think you are insolvent and cannot pay your Bounce Back Loan. We are happy to discuss this with you further and offer a free 20-minute initial call to discuss your problems.
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