Can you close a company with a Bounce Back Loan? Yes, you can close a company with a Bounce Back Loan.
The law does not stop a director from closing a company. It specifically provides for this to happen. For the vast majority of small companies, the directors and shareholders will be the same people. This means for those companies if a director wishes to stop trading a company the shareholders would not object.
Due to the risk of wrongful trading when a director trades on without there being reasonable prospects for the business to avoid insolvent liquidation, it will be relatively rare for a director of an insolvent and struggling company to be in breach of duty by ceasing to trade and closing down the business.
What Is A Bounce Back Loan?
A Bounce Back Loan was a form of UK government backed Covid finance made available by the British Business Bank to assist businesses affected by the global pandemic.
The unique feature of the Bounce Back Loan Support Scheme was the availability of a loan of up to a maximum of £50,000 for a company. The level of the loan could not be more than 25% of turnover. A company could not have more than one Bounce Back Loan which was to be used for the economic benefit of the business and which had to be trading by 1 March 2020.
What Made Bounce Back Loans Unique Finance?
Bounce Back Loans were unique finance because the government guaranteed the loans if the borrower defaulted. Interest was at 2.5% and they became repayable in many cases over a ten year period due to the pay as you grow scheme.
To enable the scheme to be rolled out quickly and without the loan application process (which was extended to huge numbers of businesses) being overwhelmed, the borrower in effect self-certified the application without the usual bank due diligence checks when extending credit.
As a result, a vast amount of public money was lent to businesses without security being provided to protect the lender in the event of Bounce Back Loan default. The lender was not permitted to require the business owners to provide a personal guarantee. Instead to ensure the lender was not at risk the government provided a guarantee.
Why Can You Close A Company With A Bounce Back Loan?
Although a Bounce Back Loan was a unique form of finance as to qualify for the loan certain conditions needed to be met and it had to be used in a specific way, it was nevertheless still an unsecured loan. The lender therefore has the same rights as any unsecured creditor and does not enjoy any preferential creditor status.
The lender of a Bounce Back Loan cannot stop a company from closing or stop the directors from taking steps to do so.
It follows that closing a company with a Bounce Back Loan can be done using the relevant procedures available under the Insolvency Act 1986 if a company wishes to go into liquidation as would normally be the case.
For many businesses, the Bounce Back Loan did not provide more than a temporary breathing space, particularly as the severe economic downturn continued once war broke out in the Ukraine and commodity prices led to rampant inflation. As a result, many businesses have never recovered since the pandemic started in early 2020 and have closed or need to.
How To Close A Company With A Bounce Back Loan
By far the most common the most common way to close a company with a Bounce Back Loan is to use the insolvency procedure Creditors Voluntary Liquidation. This is the voluntary liquidation procedure applicable for insolvent companies.
As a director cannot liquidate their company themselves they need to appoint an Insolvency Practitioner to place the company in liquidation who can then be appointed as the liquidator.
To liquidate a company with a Bounce Back Loan in this way requires the director to convene a procedure so the shareholders can pass a company resolution for voluntary liquidation. Creditors will then be required to confirm the appointment of the liquidator. The liquidator once appointed can then conduct an orderly winding up of the company by realising the assets and making any surplus after costs available for creditors.
This process is often regarded as preferable to a director waiting for a creditor to winding up a company through court action and it being placed into Compulsory Liquidation. This puts the creditors to an added cost.
Creditors Voluntary Liquidation is a useful means of closing a company with a Bounce Back Loan because it shows the directors to have acted responsibly and been proactive in accordance with their directors’ duties to act in the best interests of the company.
For more information, read our how to close a limited company page.
