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The government backed Bounce Back Loan Scheme helped many businesses stay afloat during the coronavirus pandemic. But ongoing business challenges, like the cost of living crisis, mean that many businesses are struggling to repay these loans and continue trading.
For the worst affected businesses, some directors are thinking about closing down and liquidating their companies for good.
But can you close a business when it has an outstanding Bounce Back Loan?
The short answer is yes.
This guide will provide more information on Bounce Back Loans and what happens to them if you choose to liquidate.
Bounce Back Loans and insolvency
Bounce Back Loans were given out as part of a government scheme to help keep businesses afloat. Companies could apply for private loans worth up to £50,000 as long as all of the money was used to benefit the business.
As with any type of debt, if a company cannot afford to make Bounce Back Loan payments, it is said to be insolvent and should cease trading immediately.
Insolvent businesses have a number of options, one of which is liquidation. During a liquidation, a company’s assets are sold off to repay its creditors, who are repaid in a specific order.
A Bounce Back Loan is what’s known as an unsecured debt. This mean the loan is not secured with any collateral and that the lenders are lower down in the priority list during repayments.
If a company with an outstanding Bounce Back Loan becomes insolvent and chooses to liquidate, the loan may be repaid as part of the insolvency process.
If assets aren’t enough to cover the Bounce Back Loan debt, the Treasury will step in to repay the lender.
Can you be held personally liable for Bounce Back Loan?
One of the biggest worries for company directors considering liquidation is whether they will be held personally liable for an unpaid Bounce Back Loan.
Under the structure of a limited company, directors are generally protected from corporate insolvency due to the ‘limited liability’ aspect of ownership.
This protection extends to Bounce Back Loans, because the government and lenders did not enforce personal guarantees on the loans.
However, there is one key stipulation for the Bounce Back Loans that could mean that directors are personally liable.
Part of the loan application process asked applicants to confirm the business was not in financial difficulty as of December 31, 2019.
If an insolvency practitioner finds that a company was already in financial trouble – or if they find that the loan was used inappropriately – they are required to report this to the relevant authorities. This might mean directors could be held personally responsible. Speak to an insolvency expert for more information.
What to do if you’re struggling to repay a Bounce Back Loan?
The British Business Bank outlines several options for businesses that are finding it hard to repay a Bounce Back Loan. They say:
- Contact your lender to discuss available options
- Explore the Pay As You Grow (PAYG) payment option, which includes a number of flexible repayment options
If your company is struggling with other debts, the most important piece of advice is to contact an insolvency professional as soon as possible. The earlier you seek professional advice, the more options will likely be available to you.