Closing Ltd company with outstanding BBL - have I 'misused' it?

[rjwbailey]

I know there have been a lot of threads on insolvent companies with outstanding Bounce Back Loans, which have been very helpful to my thought process, so firstly thank you!

My own situation is that I have a small ltd co with approx £15k left on a £22k BBL. It has been limping along since COVID but there is no more income on the way realistically as things stand, so it is becoming insolvent. There are no assets. There is no DLA. The only other creditor is £1500 or so to the HMRC for normal run-of-the-mill VAT and PAYE.

While I still have access to c£5k of personal cash to engineer a soft landing, would I be better off:
1. Giving it to an IP to do a CVL and hope the BBL gets written off - happy days option
2. Make the company dormant, all bar the BBL, and drip feed the £5k in, which would cover another 2 years of repayments + optionally take the 6 months holiday - quiet life/kicking the can down the road option
3. Make the company dormant for 3 months using the BBL holiday, apply for striking off, let it be objected to by the bank and see what happens? Cheapest option?!

I have to admit I don't fully understand the point about BBL can't be used for personal purposes. The company only ever existed to take consultancy contract income and, in the main, pass it on to me through salary + dividends. So the BBL funds were effectively passed on to me to support personal expenses during COVID, when I had no income other than a tiny amount of CJRS. I didn't spend it on fast cars or holidays. Does that make option 1 a risky endeavour because I will be seen to have misused BBL funds? Really don't want to spend £5k only to be stuck with some sort of personal liability and/or barred from being a Director!

Thanks for any comments or views!
R

 

[Lee Green]

I know there have been a lot of threads on insolvent companies with outstanding Bounce Back Loans, which have been very helpful to my thought process, so firstly thank you!

My own situation is that I have a small ltd co with approx £15k left on a £22k BBL. It has been limping along since COVID but there is no more income on the way realistically as things stand, so it is becoming insolvent. There are no assets. There is no DLA. The only other creditor is £1500 or so to the HMRC for normal run-of-the-mill VAT and PAYE.

While I still have access to c£5k of personal cash to engineer a soft landing, would I be better off:
1. Giving it to an IP to do a CVL and hope the BBL gets written off - happy days option
2. Make the company dormant, all bar the BBL, and drip feed the £5k in, which would cover another 2 years of repayments + optionally take the 6 months holiday - quiet life/kicking the can down the road option
3. Make the company dormant for 3 months using the BBL holiday, apply for striking off, let it be objected to by the bank and see what happens? Cheapest option?!

I have to admit I don't fully understand the point about BBL can't be used for personal purposes. The company only ever existed to take consultancy contract income and, in the main, pass it on to me through salary + dividends. So the BBL funds were effectively passed on to me to support personal expenses during COVID, when I had no income other than a tiny amount of CJRS. I didn't spend it on fast cars or holidays. Does that make option 1 a risky endeavour because I will be seen to have misused BBL funds? Really don't want to spend £5k only to be stuck with some sort of personal liability and/or barred from being a Director!

Thanks for any comments or views!
R

Ill start with options 2 and 3 first.

Realistically, whilst there is a BBL and HMRC debt due, I would expect one of them to object to any strike off application (whether a voluntary application by you or compulsory strike off by Co House).

Equally though, neither of the creditors are likely to pursue a winding up. This ultimately means the company ends up sitting in limbo, which is not really what you want.

Even if the Company was struck off, a creditor can apply for it to be reinstated and the insolvency service now have powers to pursue directors of struck off companies.

Accordingly, If you have funds to cover the costs of a Liquidation then that would provide you with certainty and ensure the company is properly wound up. The Liquidation will enable the bank to claim back under the government guarantee. It gives you peace of mind that the affairs are concluded and nothing will come out of the woodwork years down the line.

Have you misused the BBL by using it for personal income? Probably not if the funds were drawn out piecemeal in line with pre pandemic drawings. The directors who have been pursued are typically those who obtained the BBL and then withdrew all of the funds following receipt. Alternatively, the BBL was obtained using false turnover figures etc.

My question would be, "how were the BBL funds withdrawn treated?" Assuming it wasn't paid to you via the payroll then, In the absence of profits or reserves, those drawings would usually create an overdrawn DLA position (assuming there wasn't a credit balance). You mention that you dont have a DLA and, assuming this is correct, then it would appear there should not be any claim against you by a Liquidator.

No IP should ever guarantee a director that they wont end up being disqualified though. The IP will only have conducted an appropriate investigation after their appointment and won't necessarily know all of the relevant facts of a case from initial discussions. Ultimately, it is not the IPs decision either.

 

[ChrisCallaghan]

Hi @rjwbailey ,

I was just about to start a reply, but @Lee Green has beat me to it, and summed it up perfectly.

 

[Lisa Thomas]

Same

 

[Frank Wessely]

Hi @rjwbailey

Thanks for the very clear narrative.

As clearly outlined, option 1 above should provide assurance that the company issues are being put to bed and you can move on. Option 3 means that the company will be “hanging around” for at least 2 years and during that time you will continue to have filing obligations as a director.

It comes down to what is the best use for the £5k personal cash, in your opinion?

Thanks.

 

[Gyumri]

Option 2 sounds like the best option although the BBL is not your personal responsibility to "drip feed" with your own money.

As @Frank Wessely said it comes down to how generous you are feeling with your £5,000.

 

[bovine]

Not an IP, but reading your post you mention there is no DLA and the company was for taking contract income and paying it out to you, so probably had fairly low expenses. From that limited information I would wonder if there is in fact an overdrawn DLA, but you just dont know it. How was the £15k taken out of the company for your personal expenses? Has it gone through regularly as salary? Has an accountant finalised the accounts and agreed there is no DLA?

Sometimes directors are very confident there is no overdrawn dla, but when its looked at properly discover in fact there is a dla that is owed. Which the IP will then ask you to repay.

If i were in your position, I would option 3 and wait. Currently its unknown how long the dormant companies are going to be left in limbo but eventually something will be done to close them. May take a few years but I dont really see that as a major issue. I wouldnt put my own money into the company to pay off the debt or pay my own money to liquidate (unless you are 100% sure there is no overdrawn dla and want to bring things to a close quicker).

 

[rjwbailey]

Not an IP, but reading your post you mention there is no DLA and the company was for taking contract income and paying it out to you, so probably had fairly low expenses. From that limited information I would wonder if there is in fact an overdrawn DLA, but you just dont know it. How was the £15k taken out of the company for your personal expenses? Has it gone through regularly as salary? Has an accountant finalised the accounts and agreed there is no DLA?

Sometimes directors are very confident there is no overdrawn dla, but when its looked at properly discover in fact there is a dla that is owed. Which the IP will then ask you to repay.

If i were in your position, I would option 3 and wait. Currently its unknown how long the dormant companies are going to be left in limbo but eventually something will be done to close them. May take a few years but I dont really see that as a major issue. I wouldnt put my own money into the company to pay off the debt or pay my own money to liquidate (unless you are 100% sure there is no overdrawn dla and want to bring things to a close quicker).

I am an accountant by background (believe it or not!) so, yes, I am sure there is no overdrawn DLA. The money was extracted via this route, as well as salary, but the DLA was repaid to the company by July 2022, from earnings I made from other businesses I am involved in.

Thanks for your take on the options nonetheless!

 

[eteb3]

I have to admit I don't fully understand the point about BBL can't be used for personal purposes. The company only ever existed to take consultancy contract income and, in the main, pass it on to me through salary + dividends.

By the sounds of it, no: the company existed to separate you from the business liabilities, and to take advantage of lower tax on dividends versus income.

Sauce for the goose is sauce for the gander, I’m afraid. The BBL was for the company’s benefit, not yours, just as it’s the company’s liability, not yours. Otherwise you take the benefit, while the company (and its creditor, the taxpayer) takes the hit.

 

[Daybooks]

Notwithstanding the legal issues addressed by others - whether you have “misused” the funds is probably down to matters of fact.

Just re-enforcing what others have said or alluded to:
Did you simply take the money out or did you pay yourself a salary accounting for any taxes due and reporting under Real Time Information if applicable, or pay yourself a lawful dividend?

You need your accounts drawn up based on the contemporaneous records. If it is shown you were insolvent then your director duties would have been to the creditors. Remember under the Companies Act (s386) you have a duty to maintain accounting records that show the financial position of the company at any time.

 

[Newchodge]

I am an accountant by background (believe it or not!) so, yes, I am sure there is no overdrawn DLA. The money was extracted via this route, as well as salary, but the DLA was repaid to the company by July 2022, from earnings I made from other businesses I am involved in.

Thanks for your take on the options nonetheless!

So what happened to the BBL money that you took and repaid as a loan?

 

[rjwbailey]

So what happened to the BBL money that you took and repaid as a loan?

It was drawn as salary + director's loan and spent on the 'normal' household expenses over a period of months, after having taken advantage of whatever payment holidays etc were on offer.

 

[Newchodge]

It was drawn as salary + director's loan and spent on the 'normal' household expenses over a period of months, after having taken advantage of whatever payment holidays etc were on offer.

But there is no director's loan outstanding?

Was the salary at a similar level to the salary paid pre BBL?

 

[rjwbailey]

But there is no director's loan outstanding?

Was the salary at a similar level to the salary paid pre BBL?

The director's loan was repaid post-COVID from profits made in other businesses I am involved in. That cash could have been spent repaying the BBL early I guess. But I left it ticking along, making the monthly repayments, and used the cash to fund that year's salaries. So the company was making a loss but was solvent in cash terms. It seemed like the best option at the time, to repay slowly while I tried to grow other income streams.

The salary was at exactly the level pre BBL. The loan in effect replaced the dividends I had historically taken. But obviously there was no distributable profits during COVID from which to declare a dividend, as there was no income coming in.

 

[eteb3]

How was the company lending money to its director intended to benefit the company? (Rhetorical question, probably)

That cash could have been spent repaying the BBL early I guess. But I left it ticking along, making the monthly repayments, and used the cash to fund that year's salaries. So the company was making a loss but was solvent in cash terms.

Are you confident that paying the salaries wasn't an illegal preference, given where the company is now?

 

[rjwbailey]

How was the company lending money to its director intended to benefit the company? (Rhetorical question, probably)


Are you confident that paying the salaries wasn't an illegal preference, given where the company is now?

I thought it would give the opportunity to raise the corpse of a business from the dead when COVID was over I suppose. The only other alternative I had was to go straight on to Universal Credit. At least taking a loan, I hoped to repay the taxpayer support in future years, rather than going straight onto benefits. I can see you take me for a crook, but that was not the intention.

I am not sure what an illegal preference is, but, no, I'm not massively confident in my decision with hindsight. Hence my asking the question!

 

[eteb3]

What Is A Preference Under The Insolvency Act 1986?

Preference payments occur when a particular creditor is placed in a more beneficial position to the detriment of other outstanding creditors

business-insolvency-helpline.co.uk

Where the creditor is an associate or connected company, a payment made within 2 years prior to the presentation of the ... winding up petition could be considered a preference.

However, the time will not be relevant unless it can be shown that the ... company was insolvent (as defined in the Act) at the time of the payment, OR became insolvent as a result of the payment

 

[eteb3]

I don't take you for a crook, but I personally get very impatient with single-member companies being treated as an extension of the owner's personal assets ("but they're not my liabilities, naturally, or why would I have incorporated? Other mugs can suck those up!")

With the best possible opinion I don't conclude that of you personally (EDIT not least bc the DL is repaid), but your post has a whiff of all that.

 

[UK Contractor Accountant]

Payment of salaries with the BBL is not the problem here as they have been paid at the same level as pre Covid level.

The Director loan taken using the BBL is an abuse of BBL funds - the fact that it was paid back is irrelevant.

It will up to the Insolvency Service to decide whether any punishment is dished out.

 

[ChrisCallaghan]

Payment of salaries with the BBL is not the problem here as they have been paid at the same level as pre Covid level.

The Director loan taken using the BBL is an abuse of BBL funds - the fact that it was paid back is irrelevant.

It will up to the Insolvency Service to decide whether any punishment is dished out.

Considering my own cases and published directors ban, I believe it is unlikely that OP would be facing a directors ban or similar, largely based on the fact that he has repaid
the potential misuse of BBL funds back into the company. Assuming those repaid funds were then used for the benefit of the business, he's effectively corrected the offence. I'm also assuming that the amount of BBL applied for was in line with the company's turnover.

Obviously myself (or any insolvency advisor for that matter) could not say for certain, as it's entirely up to the Insolvency Service.

 

[Spongebob]

CLOSING A LIMITED COMPANY WTH INSUFFICIENT FUNDS WITH WHICH TO PAY AN INSOLVENCY PRACTITIONER

CLOSING AN INSOLVENT LIMITED COMPANY WITH INSUFFICIENT FUNDS WITH WHICH TO PAY AN INSOLVENCY PRACTITIONER If a company is unable to carry on trading due to becoming insolvent the standard procedure for closing it down is for the directors to appoint an Insolvency Practitioner to liquidate it...

www.ukbusinessforums.co.uk