BBL, director's loan, bankruptcy 10 February 2021 at 9:48AM edited 10 February 2021 at 3:04PM in Bankruptcy & living with it 9 replies 548 views

lancel2020

Wife and I are the only two directors of a limited company, with just us in it, and after COVID-19 we were earning less than £1,000 monthly, both.
We took a £22K BBL, with which we paid ourselves, using directors' loans. We are already maxed out on personal loans, so that was the only way to keep our family going (only way to buy food, pay the mortgage and the usual stuff). 
Since our income has not increased since March 2020, despite us trying to get second jobs, there is no way that we can start paying the BBL back, and we are thinking of liquidating the limited company.
I would like advice on what happens to the directors' loans (paid with the bbl) once we liquidate the company.
Please note that I don't need moral/wise advice such as "this is unethical", "the bounce back loans are not for the purpose of paying yourselves", "you should have dealt better with your finances".
I need professional/qualified advice on what happens to the directors' loans if we liquidate the company, and whether it's a good idea to liquidate the company at this point (considering we also have £30K of personal loans). 

Many thanks to anyone willing to help me.

SeanG79

Overdrawn directors’ loan accounts and liquidation

Operating an overdrawn director’s loan account during the time leading up to insolvency, and when the company enters liquidation, can result in serious financial difficulty for you on a personal basis.

If it’s later found that you took a loan from the company that couldn’t be financially supported at the time, maybe because the business was already in decline, the repercussions can be severe.

The liquidator’s overall responsibility is to the company’s creditors – they have a duty to realise the business’ assets and collect in all debts for the benefit of creditors. Although there is a legal separation between you and the company, in these instances directors’ loans cannot simply be written off when the business experiences financial difficulty.

What are the possible ramifications?

• The loan(s) must be repaid regardless of your personal financial circumstances - being unable to repay an overdrawn director’s loan account in liquidation introduces the risk of personal bankruptcy as well as other sanctions being made
• The liquidator will pursue you through the courts for the monies owed
• In addition to personal financial hardship or personal bankruptcy alongside the liquidation of your company, these sanctions could include disqualification as a director for 2-15 years if misconduct is found
• If any illegal activity is discovered, you may face criminal prosecution and a prison sentence

macman

The loan will be viewed by the liquidator as an asset of the company and they will seek to recover the debt, just as they would from any other debtors owing it money.

Minkym00

First things first....what is your current asset position? Do you have a house with any equity in it?

Grumpy_chap

As I read the OP:

1. The company borrowed £22k (BBLS).  Liability of the company.
2. The company lent £22k to the Directors (Directors loan account).  Asset of the company.

So, the company is not insolvent and bankruptcy of the company is not appropriate.  The Insolvency Practitioner will pursue recovery of the debt from the Directors Loan Account so that the company can settle it's liabilities to repay the BBLS.

Has the OP taken the advice of an Accountant?  There may be tax (BIK) associated with the loan and taking Director's Loan may not have been the most appropriate way to draw funds, although an Insolvency Practitioner may look through any other way of transferring funds to the Directors and still come to the same conclusion that the money needs to be repaid by the Directors.

1. What was the £22k spent on?  Normal living expenses? Repayment of other debt, inc regular mortgage?  Buying something like a new car?
2. What other steps have the Directors taken to reduce outgoings?  Company and personal?  Mortgage holiday?  Tax deferrals?  Just doing less, quite easy as everywhere is closed?
3. Do the Directors have any assets that the company can seek recovery against?  If not, personal bankruptcy may be a consideration, but obviously not a route to follow lightly.
4. Can the OP and his wife get any other income?  In a totally different field and lower rate of pay, for example cleaning?  Care homes near us seem to be advertising a lot.
5. Are the OP and his wife claiming UC?  If not, why not eligible?  Are they able to claim nJSA?

There is a lot of similarity between the OP's position and my personal position.  Except, given that we have been in total lock-down, my spending and outgoings are so massively reduced.  Could not have spent £22k in the last year if I tried (mortgage payment excluded).

Finally, the OP concludes:

lancel2020 said:

I need professional/qualified advice on what happens to the directors' loans if we liquidate the company, and whether it's a good idea to liquidate the company at this point (considering we also have £30K of personal loans). 

I agree that professional advice is required, but that will require engaging and paying a professional on a paid basis.  The first port of call would be the regular Accountant that the OP / Ltd Co uses.
All the OP can hope for in a public forum is considered / informed advice, even if it is from a qualified person, PI cover won't apply and the full details are not available in a short forum post and comments can only be at the level of "helpful".  Even then, well-intentioned comments may still be incorrect.  The OP can take on board comments but final outcome will need the professional review and advice to conclude.

EDIT:  If the OP has £30k personal debt plus £22k BBLS, then it would be very wise to prepare a SoA and pop over to the DFW wannabe board for advice before taking any action on the bankruptcy routes (either personal or Ltd Co).

lancel2020

Minkym00 said:

First things first....what is your current asset position? Do you have a house with any equity in it?

Yes, we have a house with £60k equity in it.

lancel2020

Grumpy_chap said:

As I read the OP:

1. The company borrowed £22k (BBLS).  Liability of the company.
2. The company lent £22k to the Directors (Directors loan account).  Asset of the company.

So, the company is not insolvent and bankruptcy of the company is not appropriate.  The Insolvency Practitioner will pursue recovery of the debt from the Directors Loan Account so that the company can settle it's liabilities to repay the BBLS.

Has the OP taken the advice of an Accountant?  There may be tax (BIK) associated with the loan and taking Director's Loan may not have been the most appropriate way to draw funds, although an Insolvency Practitioner may look through any other way of transferring funds to the Directors and still come to the same conclusion that the money needs to be repaid by the Directors.

1. What was the £22k spent on?  Normal living expenses? Repayment of other debt, inc regular mortgage?  Buying something like a new car?
2. What other steps have the Directors taken to reduce outgoings?  Company and personal?  Mortgage holiday?  Tax deferrals?  Just doing less, quite easy as everywhere is closed?
3. Do the Directors have any assets that the company can seek recovery against?  If not, personal bankruptcy may be a consideration, but obviously not a route to follow lightly.
4. Can the OP and his wife get any other income?  In a totally different field and lower rate of pay, for example cleaning?  Care homes near us seem to be advertising a lot.
5. Are the OP and his wife claiming UC?  If not, why not eligible?  Are they able to claim nJSA?

There is a lot of similarity between the OP's position and my personal position.  Except, given that we have been in total lock-down, my spending and outgoings are so massively reduced.  Could not have spent £22k in the last year if I tried (mortgage payment excluded).

Finally, the OP concludes:

lancel2020 said:

I need professional/qualified advice on what happens to the directors' loans if we liquidate the company, and whether it's a good idea to liquidate the company at this point (considering we also have £30K of personal loans). 

I agree that professional advice is required, but that will require engaging and paying a professional on a paid basis.  The first port of call would be the regular Accountant that the OP / Ltd Co uses.
All the OP can hope for in a public forum is considered / informed advice, even if it is from a qualified person, PI cover won't apply and the full details are not available in a short forum post and comments can only be at the level of "helpful".  Even then, well-intentioned comments may still be incorrect.  The OP can take on board comments but final outcome will need the professional review and advice to conclude.

EDIT:  If the OP has £30k personal debt plus £22k BBLS, then it would be very wise to prepare a SoA and pop over to the DFW wannabe board for advice before taking any action on the bankruptcy routes (either personal or Ltd Co).

Thank you very much for the long reply. We haven't talked to our accountant yet. To reply to your questions:

1) Yes, the £22k were spent for paying the mortgage, loans,bills, living costs. There are still £3K left, but they will end soon.
2) We took a mortgage holiday, and a holiday on the 2 loans. 
3) The only asset we have is the house, mortgaged; our equity is about £60k.
4) My wife found a temporary job, while I am trying to find some self-employed work and look after our son at the same time, who is not going to school at the moment because of lockdown.
5) We didn't know we could claim UC, stupidly. We enquired only last week, and are now getting £875 a month.

I hadn't thought of personal bankruptcy, it might be a possibility. I will try and do what you suggest, asking for advice. Many thanks.

Grumpy_chap

lancel2020 said:

I hadn't thought of personal bankruptcy, it might be a possibility. I will try and do what you suggest, asking for advice. Many thanks.

For clarity, I don't recommend personal bankruptcy.  It is not an area I know sufficiently enough about to either recommend for or against.  There are others on here that will be able to comment with better knowledge that may be able to advise.  I am not even sure, with £60k equity (house) and £30k plus £22k debts totaling £55k, you'd even be "bankrupt" as equity > debt, but I genuinely do not know how the bankruptcy process considers primary private residence.  

Do prepare the SoA as there must be efficiencies that are possible.  Priority is getting monthly outgoings lower than the amount you receive on UC plus your wife's temporary income.  However hard that seems, the people in the DFW forum will be able to help you work to that.

Some good advice about the Ltd Co is definitely needed as I can think of reasons why keeping it open may actually give you more options.  If you close the Ltd Co, then that £22k BBLS is immediately repayable from you to the company to the lender.  If you keep the Ltd Co open, then that £22k is repayable over 10 years, there are payment-break options and you still have the company ready to go as soon as work recovers in your sector.  That is maybe not the purpose of BBLS, but seems to be in the rules, and needs must.

Minkym00

No judgement here, but you should know that a director's disqualification is very likely and should consider how that might affect your future. 

noitsnotme

There are hefty tax implications of not paying the directors loan back in a timely manner...

”A director’s loan must be repaid within nine months and one day of the company’s year-end, or you will face a heavy tax penalty. Any unpaid balance at that time will be subject to a 32.5 per cent corporation tax charge (known as S455 tax)”

https://www.unbiased.co.uk/life/small-business/directors-loans#How%20soon%20repay%20director's%20loan?