Could There Be a Problem With the Government Loans for Businesses?

The coronavirus crisis has had an unprecedented effect on the UK economy. As a result the government has introduced a swathe of measures to try to stabilize the economy. This includes the Bounce Back Loan Scheme (BBLS) which “enables smaller businesses to access finance more quickly”, through a 100% state-backed loan of up to £50,000. The scheme was launched on the 4th of May and had more than 100,000 applications on the first day. These loans are the life blood that will help businesses survive, however taking them may result in unforeseen consequences.

Could there be a problem for directors of limited companies ?

The loans have very generous terms, with no interest or repayments in the first year. But it could means that the company’s liabilities – what the company owes- are greater than its assets – what the company owns. If a company cannot repay its liabilities then it is considered insolvent.

Is this a problem ?

Well it could be.

If a company trades while it is insolvent then the directors become personally liable for any trading losses incurred. In other words, they lose the protection of having limited company status, whereby they would not be liable for the losses if they were incurred while the company was solvent.

So once they’ve received the loans does this mean that a company shouldn’t start up trading ?

Not quite.

The loans do not have to be repaid for 12 months so short term they do not really affect solvency and as long as directors are reasonably sure that they can trade profitably this won’t be a problem.

However, if the company can’t trade profitably in the new climate and makes losses, then the directors should be aware that they could be held personally liable for these losses, because they will have arisen while the company is insolvent.

So if you take out the loan, you need to be reasonably certain that you will be able to trade profitably when business resumes.

How would a company know if it is insolvent ?

The company may need an accountant to prepare a balance sheet to identify all the assets and liabilities. This will show if the liabilities are greater than the assets and whether a director should be concerned.

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