Coronavirus Business Interruption Loan Scheme - stick or twist?

The Government has offered unprecedented levels of financial support to businesses and individuals. Where that comes in the form of grants such as the Coronavirus Job Retention Scheme, business rate holidays and the Small Business Grants Scheme, businesses will be looking to take full advantage of the funds available. Where the Government is offering to defer payments such as VAT or offering incentives to take out Coronavirus Business Interruption Loan Schemes (CBILS), this is a welcome support in cash flow terms, but businesses will need to consider carefully the extent to which they will be able to repay those loans and meet those liabilities in the long term.

Personal liability

The main ways in which a director may incur personal liability to a company's creditors are as a result of giving personal guarantees on borrowing or in respect of lease liabilities, or wrongful trading. Liability for wrongful trading occurs where a director allows a company to continue to trade when he knew or ought to have concluded that the company had no reasonable prospect of avoiding insolvent liquidation. In those circumstances, a director may be liable for the extent to which the creditors have been put in a worse position as a result of the continuation of the trade.

The Government has offered support on both of these fronts by:

1. temporarily suspending director’s liability for wrongful trading; and
2. providing that the banks are not allowed to ask for personal guarantees in respect of a CBIL for a facility of below £250,000.

However, directors should be aware that when a company is trading while insolvent, the directors should no longer prioritise the interests of the shareholders and instead must act in the best interest of the company's creditors. As the Government has specifically sought to remove liability for wrongful trading, it is not clear whether they will also protect directors from claims for breach of their duty to act in the interests of the creditors if they continue to trade while insolvent.

Coronavirus Business Interruption Loan Scheme 

The temporary Coronavirus Business Interruption Loan Scheme supports SMEs with access to borrowings of up to £5 million for up to 6 years. The finance is offered through a list of 40 accredited lenders including the high street banks. You are therefore likely to first discuss this with your existing bank.

The Government is incentivising the banks to offer this finance by agreeing to guarantee up to 80% of the loan. The banks are not allowed to ask for personal guarantees for facilities under £250,000. Any personal guarantee given in respect of loans over £250,00 must be kept at 20% of the outstanding balance and are not allowed to be backed by security over the guarantor’s personal private residence.

As a further incentive to the borrower, the Government will make a grant to cover the first 12 months of interest and any initial bank charges in relation to the finance. If you are accessing the CBIL through an existing lender, then you should review what existing personal guarantees you have given to that lender and the extent to which those guarantees may or may not apply to the CBILS.

Should I stick or twist?

The Government may see it as in their interests and the economy’s interests that businesses should borrow so that they can trade through the lockdown period and beyond, but directors need to ensure that they have considered the long-term prospects of the company and the ability of the company to trade through this economic slowdown and pay off those liabilities and the debt extended during this crisis. Forecasting is particularly difficult when no one can be certain how long the lock down and subsequent restrictions will last and how quickly we will return to business as usual afterwards.

Business owners may want to consider the value of the business relative to the extent of the liabilities which are being increased as a result of continuing to trade. If it would be more expensive to start an equivalent new business from scratch or buy an equivalent business than to pay off the debts incurred, then borrowing to keep the business trading is likely to remain attractive, especially with the Government taking on the cost of the first year’s interest and bank fees.  Directors should also have regard to the interests of the company’s employees and so continuing to trade is most likely to be in the best interests of the employees.

If it would be less expensive to start an equivalent new business from scratch or buy an equivalent business than to pay off the debts and liabilities incurred,  then some owner managed businesses may take the view it is better to cease trading and/or put the company into administration or liquidation now before incurring additional debt and worsening the position of creditors. Every business has it own unique set of circumstances and opportunities and we recommend that you review your financial position and forecast with your accountants to determine how best to proceed.

If you have any questions relating to directors’ duties and the options available to you, please contact Jon Rathbone on 01242 586832 or at jdr@hughes-paddison.co.uk.