Can I liquidate my business if I have a bounce back loan?
If, as a director of a company, you are neglecting the interests of creditors, you will immediately find yourself in the line of fire of a bankruptcy investigation into the director’s conduct if you initiate the winding up of the company. The informal company closure path, also known as closure, is a path that is designed for companies with no corporate debt. Therefore, investigations into the conduct of directors are not conducted by default during a company cancellation.
A new legal measure is set to come into play preventing directors from closing their businesses informally in order to avoid an investigation into directors’ conduct rather than going through formal bankruptcy proceedings. The first reading recently took place in Parliament and the measure appears to come into force at the end of 2021.
Since the bounce-back loan repayments are due after the optional repayment hiatus, business leaders need to prepare the company’s cash flow for additional expenses. If this path is currently being pursued by your limited liability company with an outstanding bounce-back loan instead of a formal bankruptcy path, you will likely receive an “Company Notice of Dismissal.” After the rules are approved, the alarm bells will ring and an investigation by the bankruptcy service will be launched.
> See also: What if i can’t repay my bounce back loan?
Can I be investigated for misusing my bounce back loan?
The measure aims to punish company directors who want to escape their bounce-back loan liabilities by going off strike to avoid an investigation. It is in the best interests of the government and taxpayers to enforce early deterrence as this could put pressure on public finances as the loan is 100 percent government backed.
In the event of a business closure, the government must pay any remaining bounce-back loan debt. This preventive measure is aimed at company managers who want to free themselves from their repayment obligations to creditors.
Will my bounce back loan lender be considered a creditor?
At the onset of the coronavirus pandemic, the government was heavily promoting emergency aid through the bounce-back loan program for SMEs experiencing severe cash flow slumps and revenue disruptions. Loans between £ 2,000 and £ 50,000 have been granted with maturities between 6 and 10 years. Offered via a simple application form, the funds were made available within 24 to 48 hours without a tough credit check.
Although this was vital for the economy, companies that were permanently insolvent burdened their GmbH with unmanageable debts. In conjunction with the moratorium on petitioning, companies that were very vulnerable to creditors’ lawsuits have been given temporary protection – in some cases their demise has been delayed rather than facilitated a rescue.
Keith Tully, Partner at Real Business Rescue, said: “We are approached daily by corporate executives who have been hard hit by the Covid-19 pandemic and are on the verge of collapse due to growing debt to creditors.
“During the debt recovery phase, many business owners come to the realization that the bounce back loan is actually a corporate liability for which there is a named creditor.
“The friendly coat is then deducted from the loan that was once marketed as accessible without a tough credit check or business capability check and piles up on the corporate debt list.”
As of March 21, 2021, over £ 1.5 million bounce back loan applications had been approved and more than £ 46 billion raised, including top-ups. As the economy recovers, the government is filling a loophole to prevent directors from acting unscrupulous.
> See also: Loan Repayment Calculator – How Much Is Your Loan Costing?
What are the consequences of a director’s investigation?
Once an investigation into the conduct of directors is initiated and you are found guilty of relinquishing your duties as a director of the company or of breaching the terms of your bounce back loan, you could seriously affect your ability to run a business could affect. You can be disqualified or even prosecuted by the director for up to 15 years.
Although bounce back loans have been offered with no personal guarantees on the directors, you can still be held personally liable for the bounce back loan if you breach the terms and conditions.
A bounce back loan can only be used for commercial activities to help the company recover from the negative conditions caused by the Covid-19 pandemic and stimulate economic recovery. Failure to comply with these terms by using the bounce back loan for personal use is essentially considered fraudulent activity as you are seeking government assistance on the pretext that it is necessary for your troubled business.
When taking out a bounce-back loan, executives were required to provide evidence that their business was not in trouble as of December 31, 2019. According to the British Business Bank, a business in trouble is classified as follows:
- Companies that have filed for bankruptcy, e.g. B. Liquidation
- Limited liability companies that have accumulated losses of more than half of their share capital in their last annual financial statements (does not apply to SMEs under 3 years of age)
- When the company has received restructuring aid and is in the process of restructuring
A distressed company eligible for a bounce back loan is in the process of a business restructuring, a process used to serve companies in financial distress. A company in difficulty is also a company in liquidation that can no longer be revived.
Are there any reservations about closing my business on a bounce back loan?
If your company is really unable to handle corporate debt due to Covid-19 complications and you still want to liquidate your company with a bounce back loan, you can conduct the company liquidation under the guidance of a licensed liquidator. Your bounce-back loan is an unsecured debt that will be repaid after liquidator fees and preferential debt have been paid. If unlawful or fraudulent trading is not suspected, your business will be liquidated and your remaining bounce-back loan will be repaid by the government.
If you are unsure of your position with respect to an outstanding bounce back loan and are looking to liquidate your business, contact a reputable accountant or licensed liquidator.
David Tattersall is Head of Client Relations at Handpicked Accountants
Government Bounce Back Loans For Your Small Business