What Happens To A Covid Bounce Back Loan Upon Liquidation?

From March 2020 as a result of the global Covid-19 pandemic, all UK businesses have been forced to trade subject to a number of tough restrictions, not to mention the three long national lockdowns that prevented trade altogether for many businesses.

In order to survive with little, if any income, businesses have been forced to rely upon government support packages, such as the Coronavirus Job Retention Scheme (AKA furlough) and/or loan facilities. In this article, we focus on one specific loan that over 1.5 million businesses have obtained; a Covid Bounce Back Loan.

A Recap On Covid Bounce Back Loans

Shortly after the first national lockdown, the government recognised that many businesses would need to resort to obtaining loans in order to survive. A business loan can come from many sources and a more generic overview was covered in our previous article ‘Using a Company Loan – What Are The Ramifications In The Event of Insolvency’.

To assist businesses ‘bounce back’ from the disastrous effects of Covid, as the name would suggest, the government introduced the ‘Covid Bounce Back Loan Scheme‘.

A Covid Bounce Back Loan is a fully government-backed loan facility. The loan itself was available through a variety of high street and smaller lenders and would typically attract a much lower interest rate than any other loan facility on the market. No repayments were necessary for 12 months and, importantly, the lender could not request a personal guarantee from directors or any other security. This made the loans extremely attractive to business owners.

Repayments Now Due

It is estimated that approximately £47 billion has now been borrowed using the Covid Bounce Back Loan Scheme. For those that obtained the loan early, repayments are due to commence from June 2021.

However, with lockdown restrictions lasting much longer than anyone could have initially envisaged, deferred tax bills becoming repayable, furlough support tapering off from next month and other liabilities (such as rent) accruing over the last 15 months, many business owners are now having to face the reality that the business may not be able to survive.

These business owners are strongly urged to liaise with a licensed insolvency practice, such as our team at My Liquidation, to explore the options available. Such options could include company rescue procedures or, in the worst-case scenario, a Creditors’ Voluntary Liquidation.

The Liquidation Option – What happens to the Bounce Back Loan?

When a company enters an insolvency process, such as creditors voluntary liquidation, all liabilities crystallise.

It is the duty of the appointed Liquidator to realise the company’s assets in an attempt to achieve a return for creditors. With many small business insolvencies, a return to creditors is unfortunately rare. Those creditors must then treat the liability as a bad debt within their accounting records unless they have the benefit of a guarantee from any other party. To understand more about this, please read our article entitled ‘Creditors in a Voluntary Liquidation – Who Gets Paid First?’

So, what specifically happens with a Covid Bounce Back Loan in a liquidation scenario? Well, this will rank as an unsecured creditor claim in the liquidation. The lender does not have the security of a personal guarantee and would therefore seek to recover the funds from the government.

The concept of the Covid Bounce Back Loan, and any other company liabilities, falling away without any ramifications may seem too good to be true but this is often the case. Directors should however be aware of the Liquidator’s duty to investigate the financial affairs and transactions of the company, as well as submit a report under the Company Director Disqualification Act 1986 to The Insolvency Service.

The Liquidator’s Investigation & Director Conduct

In every liquidation process, a Liquidator is obliged to review the conduct of each director who was in office during the period of 3 years preceding liquidation. In conjunction with this, a review of the financial affairs and transactions of the company will be undertaken to ascertain if there is any evidence of wrongdoing.

‘Wrongdoing’ in the context of a director’s conduct review, could be evidence of wrongful trading, preferring one creditor over another, transactions at an undervalue, taking customer deposits without providing goods or services, trading on Crown debts …. the list goes on. The Insolvency Service review each case individually, so there is no one set rule for action against directors given a specific set of circumstances. If the Insolvency Service conclude that a director is unfit to act, they can be disqualified from being involved in the management, promotion or formation of a business for a period of 2-15 years.

A relatively new introduction to a Liquidator’s investigation will be to understand how a company has utilised funds obtained from a Covid Bounce Back Loan in the period leading up to liquidation. As a general rule of thumb, if the loan funds have been used for general business expenditure, there is nothing to worry about. The same does not apply, however, if directors have opted to use the funds to repay their director loan accounts or perhaps fund the purchase of a new car for personal use, for example. In such circumstances, it is likely that the Liquidator would have to request some form of repayment to the company from the directors.

The Spring Budget 2021 set out various measures to assist struggling businesses. It also announced that £100 million was being used for a new Taxpayer Protection Taskforce to crackdown on COVID fraudsters who have exploited UK Government support schemes. This does not mean that non-repayment of a Covid Bounce Back Loan constitutes fraud. It does, however, show the government’s clear intent to make sure such loan funds have been obtained and used in the correct manner. An insolvency practitioner plays a key role in achieving this objective where a company obtains a Covid Bounce Back Loan and subsequently enters liquidation.

Looking For More Information?

If your business has obtained a Covid Bounce Back Loan and is struggling to survive financially, please do not hesitate to contact us today for some free, confidential and no-obligation advice. We will fully explain the options available to you and address any concerns you may have specifically relating to potential ramifications as a result of obtaining a Covid Bounce Back Loan.
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