The government’s emergency Bounce Back Loan Scheme (BBLS) has been a lifeline for smaller companies during the Covid-19 pandemic.
Many businesses, however, will struggle to repay these BBLs or other debts in the coming months and years. So what are the options for small and medium businesses facing insolvency?
At Insolvency Support, we can help your company make the best out of a very difficult situation and hopefully put you on the path to recovery. Read on for our guide to the four key insolvency procedures that could be open to you.
Remember: it’s always best to act promptly before your creditors take legal action.
Small and medium businesses hit by Covid-19 or lockdown can apply for a Bounce Back Loan to tide them over.
The loans, issued by banks but 100% backed by government, are for a minimum of £2,000 and a maximum of 25% of a company’s turnover, or £50,000. Your company has until 31st January 2021 to apply for a loan or a top-up.
BBLs cover 10 years, with no repayments needed or fees or interest charged during the first 12 months. Afterwards, there is a competitive 2.5% fixed interest rate, plus options for repaying only the interest, or pausing repayments.
Unlike many loans, BBLs do not require personal guarantees from company directors.
More than 1.2 million BBLs totalling £36.9 billion were issued between May and September 2020. Due to the scheme’s emergency nature, credit and customer checks are low.
It’s estimated that, due to credit and fraud risks, between 15 and 80% of borrowers may default on their repayments, depending on the speed of the UK’s economic recovery.
The government has also introduced several temporary measures aimed at protecting companies against insolvency, such as restricting winding-up petitions issued by creditors. However, these are due to be lifted in the coming months.
If your business cannot pay its debts, you need to appoint a licensed insolvency practitioner, such as Insolvency Support, to advise on a course of action, avert potential legal threats, and manage the process. So what are your main insolvency options?
A Company Voluntary Arrangement (CVA) might be a good option to save your business if you and your insolvency practitioner think it can become viable again.
A CVA is an agreement between an insolvent company and its creditors to pay back some or all of its debts over an extended period. Usually, this involves consolidating debts into a single monthly payment.
Companies that are either cash flow insolvent (unable to pay their debts as they are due) or balance-sheet insolvent (with liabilities greater than their assets) can propose a CVA. You’ll have to prove that your business has been profitable in the past, and that you have a plan to restore profitability. At least 75% of your creditors by debt value must agree to the proposal.
By proposing a CVA, you ease pressure and prevent legal action from your creditors, such as a winding-up petition. Company directors stay in control, with guidance from an insolvency practitioner. Some debt may be written off, and your CVA does not need to be made public.
However, it may be hard to convince your creditors to enter into such an agreement. If you break the terms of your CVA, your creditors could take legal action.
If your company is insolvent but viable, administration offers you a chance to restructure and restore your finances.
It involves your company directors handing over control temporarily to a licensed insolvency practitioner acting as an administrator, with the aim of repaying your creditors and turning your business fortunes around.
This administration period can last from a few weeks up to around a year, and your creditors cannot take legal action against you during this time. You’ll need to let your customers and suppliers know in any correspondence that your company is in administration.
If your business is financially viable in the longer term, it may be able to keep trading by agreeing a CVA or selling assets. Company directors can then regain control of the business.
However, if the administrators can’t turn your finances around, they may decide it’s necessary to close your business by entering voluntary liquidation.
If a business is insolvent but certain parts are still valuable, you might be able to enter pre-pack administration.
This is a complex procedure that enables one or more directors of an insolvent business to keep operating under a new company, preserving the business and its jobs and relationships.
You will need to appoint an insolvency practitioner and enter your existing company into administration. You will then set up a new company, and enter into negotiations to buy your insolvent business’ assets at a fair market value. Funds generated from the sale of assets will be used to pay debts, which could include Bounce Back Loans.
Because asset values are preserved, pre-pack administration can prevent job losses and maintain good business relationships.
However, the law in this area is complex. Under TUPE regulations, you might not be able to change employee terms and conditions. Your own conduct as a company director will also come under scrutiny during the administration process.
Finally, if your business is not viable, the best option might well be Creditors’ Voluntary Liquidation. This involves winding up your business and liquidating your assets to repay your debts, including any Bounce Back Loans.
To do so, 75% of your shareholders (by value of shares) will need to agree to pass a ‘winding-up resolution’. You’ll then have to appoint an insolvency practitioner as a liquidator to manage the process of selling your assets to repay your creditors.
By entering into the liquidation process voluntarily, company directors should reduce their risk of facing charges of wrongful or fraudulent trading.
Nonetheless, if you’ve worked hard to build up your business, it will undoubtedly be painful for you and your staff to see it close down.
These are tough times for small and medium businesses.
If you can’t pay your Bounce Back Loan or other debts, talk to Insolvency Support for expert advice and guidance through the complex world of insolvency. We can ease the stress you are under, and show you the path to recovery.
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