Can’t repay your limited company’s Bounce Back Loan? Don’t panic, but do act

As the economy is recovering at a steady pace on its ‘bounce back,’ company directors who did and did not take loans are working hard to recover from the loss of income suffered during covid shutdown, with raising funds for debt repayments the priority.

Although government restrictions related to the virus have now widely lifted, businesses of all shapes and sizes continue to be pounded by economic uncertainty as the threat from the pandemic is yet to subside, writes Keith Tully of Real Business Rescue.

Adding to the perfect storm for contractor-directors, the pingdemic

But reform of IR35 in the private sector back in April blighted income for contractor businesses in particular, just as coronavirus refused to relent once again. And right now, contractors both with and without a limited company are experiencing unprecedented disruption from the ‘pingdemic’, whereby individuals pinged by the NHS Test & Trace App are forced to self-isolate for financially-damaging if not prohibitive amounts of time, due to being near or in contact with someone recorded as having tested positive.

Rather bleakly, a potentially overreactive piece of software is not the only feature of the government’s covid response which is crippling some directors. As of May 31st 2021, the value of Bounce Back Loan facilities approved stood at £47.4 billion. Although these loans were presented as a saving grace to limited companies, many contractor-directors are now feeling the weight of BBL repayments, as their turnover is yet to return to ordinary levels even though lenders are actively issuing payment reminders.

So what happens to your Bounce Back Loan if you go bust; whether your BBL can be written off and whether support is available to you if you can’t repay the loan (even after accessing support from the Pay As You Grow scheme), are all among the issues unfortunately keeping too many contractor limited company directors awake at night.

Can I dissolve my limited company with a Bounce Back Loan?

If you are wondering whether you can wind-up your limited company with an outstanding Bounce Back Loan, we urgently recommend you slow down your next steps or you could be subject to an Insolvency Service investigation into director conduct.

Due to the loans being government-backed, a new measure is in the works to introduce director investigations into the company strike off process, where an outstanding BBL is evident (N.B. You can read more about the process here).

As this route is designed for businesses free of debts, a director investigation is not conducted as standard. However, the tables are due to quickly turn to protect HMRC, as the tax department has provided a guarantee to lenders.

Given the dissolution loophole is set to be closed, you could be placed under the spotlight if you try to dissolve your limited company with an outstanding Bounce Back Loan (BBL).

Can I liquidate my limited company with a Bounce Back Loan?

Your Bounce Back Loan will be treated as any other unsecured debts which means that it does not hold preference.

If you can’t afford your Bounce Back Loan repayments, you’ll need to hire an insolvency practitioner to source a suitable insolvency procedure, such as a Creditors’ Voluntary Liquidation. Taking this route will help raise funds for creditors which will be paid in priority order and result in company liquidation (providing you used the loan responsibly).

Will I be held personally liable for my Bounce Back Loan?

Company directors may be wondering what happens to Bounce Back Loans in the event of insolvency and if personal assets will be at risk of repossession.

Bounce Back Loans were widely marketed as accessible with no personal guarantees attached. The government provided a full 100% guarantee to lenders, so if you are unable to pay them as you are insolvent, the government will settle the outstanding loan. 

But as with any loan, you could be held personally liable for the debts of the business if you failed to fulfil your duty as a company director or acted improperly.

Did I use my Bounce Back Loan wrongfully?

A BBL can only be used to provide an economic benefit to the business.

If you are suspected of Bounce Back Loan fraud, money laundering, or you took out the BBL for personal use, you could be placed under investigation and face serious repercussions, including director disqualification.

My business took at BBL but failed to bounce back from covid; what now?

If your business defaulted on its BBL and can’t afford repayments, it may be time to source a long-term solution and avoid coming under siege from creditors.

The route you take will be determined by company assets and liabilities. As a director-contractor, you will need to conduct income projections to forecast if refinancing is a suitable route for your business.

Restructuring your business through a Company Voluntary Arrangement (CVA) or Fast Track CVA can help tackle your outstanding affairs with creditors, by negotiating an affordable payment plan.

And finally, if your business has failed to ‘bounce back’ and you are therefore struggling to raise funds to cover Covid-19 loan repayments and creditor debts, this may sound the alarm for licensed insolvency practitioners to enter.