The clock is ticking on the date for repayment of Bounce Back Loans.
Borrowers are required to begin making repayments from 12 months after the date of their loan. The early takers of these loans will now have been contacted by their lenders in respect of repayment.
Bounce Back Loan facts
At the onset of the Covid-19 pandemic, the government promoted emergency support through the Bounce Back Loan Scheme for businesses experiencing severe dips in cash flow and disruption to revenue.
Loans of between £2,000 and £50,000 were made available, with loan terms extending between 6 to 10 years. Available quickly and easily via a simple application form funds were made available within 24 to 48 hours of submission of an application. This was done without a hard credit check.
Although this was seen as vital for the survival of the economy it had the effect that businesses loaded large amounts of debt onto their balance sheets. This was paired with the moratorium on winding up petitions which granted businesses susceptible to creditor action short term protection from creditors.
This temporary protection has been extended until 30th September 2021 but once it expires hard hit businesses will be forced into insolvency.
As of 21st March 2021, over 1.5 million Bounce Back Loan applications had been approved and more than £46bn borrowed.
Who foots the Bill if a Bounce back loan is not repaid?
In the event of company closure, the government will be required to repay the entirety of any unpaid Bounce Back Loan.
It is in the best interests of government and taxpayers to reduce fraud, as failure to do so could place pressure on the public purse as the loan is 100-per-cent government backed.
New measures currently before parliament targets company directors looking to avoid their repayment duties to creditors. The measures aim to identify and investigate company directors looking to avoid investigation and possible personal liability for Bounce Back Loan liabilities.
Can I liquidate my company if it has a Bounce Back Loan?
As Bounce Back Loan repayments begin to fall due companies will feel additional pressure on cash flow as they cope with additional outgoings.
If your business is genuinely unable to cope with company liabilities due to Covid-19 or general market conditions and you still want to liquidate your company with a Bounce Back Loan, you will be able to pursue company liquidation. The Bounce Back Loan is an unsecured debt that will be repaid after the liquidators’ fees and preferential debts are settled. If there are no suspicions of misfeasance the company will be liquidated, and the Bounce Back Loan will be repaid by the government.
Can I apply for dissolution if my company has a Bounce Back Loan?
An alternative to liquidation maybe to close and seek to strike off your company. This process is also known as dissolution. This is a route designed for businesses without debts. Investigations into director conduct have not historically been conducted as standard during company strike off.
Why not then simply close and apply to strike off your company if you have concerns about an investigation?
As the economy enters recovery, the government is closing in on a loophole to prevent directors who have acted unscrupulously from escaping potential liability.
The government are enacting new legislation preventing company directors from informally closing their business to avoid an investigation into director conduct. The first reading of the bill in Parliament took place recently and the measure appears likely to come into force in late 2021.
The new legislation included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill will prevent directors striking off a company without being investigated for any wrongdoing. The new measures will grant the Insolvency Service power to investigate the conduct of directors of dissolved companies.
The effect of the new measures are retrospective and the directors of any company which is dissolved without repaying a Bounce Back Loan before or after the passing of the bill can expect to be contacted about this.
It is reported that HMRC is actively recruiting 400 members of staff to undertake this additional work.
At present the directors of a company with an outstanding Bounce Back Loan which is seeking strike off is likely to receive an “Objection to Company Strike Off Notice”. This will prevent the company from being struck off.
A company can be struck off but it is unlikely that this will end any question of repayment.
After the rules are approved, this will provoke an investigation and potentially disqualification and financial repayment by way of compensation order or undertaking.
Can I face an investigation over misuse of my Bounce Back Loan?
In any liquidation the liquidator investigates the affairs of the company and the actions of its directors. If a director has neglected creditor interests in the lead up to an insolvency this will put the director in danger of an action to recover money lost to the company if the company subsequently enters liquidation.
The effect of the passing of the legislation currently before Parliament is that a similar investigation is likely to take place in non liquidation cases.
What are the possible consequences of a director investigation?
A Bounce Back Loan can only be used for commercial activity to help the business recover from the detrimental conditions inflicted by the Covid-19 pandemic and to stimulate economic recovery. Contravening these terms by using the Bounce Back Loan for personal use is essentially classed as fraudulent activity as you are claiming state support for your ailing business.
Once an investigation is launched into director conduct, if you are found breached your duties as a director or falling foul of the terms of your Bounce Back Loan, you could face serious repercussions which could end your ability to operate a business with the protection of limited liability and/or personal liability to repay some or all of the debt. You could be subject to directors disqualification for up to 15 years, and even prosecution.
Although Bounce Back Loans were offered without personal guarantees, you could still be held personally liable for the Bounce Back Loan if you breached the terms and conditions of the loan or breached your duties as a director.