What do owners and partners need to know?
Not many would have assumed that over a year after taking them that a large minority, if not majority in some industries such as hospitality, bars or nightclubs, would not have been able to begin trading at all in some circumstances, let alone fully.
We’ve covered the problems facing these businesses in earlier blogs as well as the small and closing window of opportunity for companies to implement rescue and restructuring plans ahead of creditor actions such as winding up petitions resuming and the CJRS furloughs ending at the end of September.
But what about sole traders and partnerships facing the same issues?
Limited companies have established legal protections that stop creditors from pursuing individual directors and owners for debts – unless a personal guarantee was given – but sole traders and partnerships don’t have this shield.
When applying for bounce back loans, the British Business Bank stated that sole traders and partnerships had to have been given sufficient information about the borrowing and incurred debts and repayments before any finance was given, under the provisions of the Consumer Credit Act.
If this wasn’t adhered to by the lender underwriting the agreement and providing the funds then they would lose their ability to collect repayments on the loan – although they would be expected to challenge this. The onus would be on the borrower to prove they hadn’t been adequately informed either at the time or during the course of the agreement.
The Consumer Credit Act doesn’t apply to the bounce back loan scheme in its entirety although not all of its protections were removed, meaning the information requirement remained and that the collection of the loans were still regulated meaning that lenders would still have to comply with the relevant regulations should borrowers encounter financial difficulties.
Additionally, lenders were not permitted to ask for or seek any personal guarantees for access to the bounce back loan scheme.
Sole traders and members of a partnership are often used to risking their personal assets when borrowing so would be reassured that under the terms of the bounce back loan scheme, no recovery action can be taken by lenders over either a principal private residence or a primary personal vehicle – their home or car.
This doesn’t mean that they cannot be pursued for outstanding bounce back loan debts or unpaid installments. Their other personal assets may still be at risk of recovery action from the end of September.
One other important caveat partnerships or sole traders who borrowed under the scheme should be aware of – they should not have been in financial trouble when they obtained the finance.
From September 2020, an additional undertaking was inserted into the bounce back loan borrowing conditions making this requirement clear.
The definition of a “business in difficulty” is that partnerships should not have accumulated losses greater than half of their capital in their most recent annual accounts – although this does not apply to firms three years old or less.
For sole traders the requirement was that they should not have been in an active insolvency procedure while they sought the funding.
The biggest problem for sole traders to overcome if they can’t repay their bounce back loans, is that legally, there’s no difference between personal and business assets. This means that any business debt is personally owed and therefore recoverable from personal assets.
Creditors can and will use high court enforcement officers or bailiffs to obtain whatever they can to sell and regain some of their funds.
These too are currently limited (although not if the company was considered insolvent before the Coronavirus lockdowns started in March 2020) but are scheduled to return within ten weeks.
If a sole trader is in financial difficulty and can’t make bounce back loan repayments or other debts then they have insolvency options but not as many as a limited company or even a partnership so it’s even more important that they get professional advice at the earliest opportunity.
The advantages and drawbacks of partnerships
Chris Horner, Insolvency director with Businessrescueexpert.co.uk said: “One of the main advantages of running a business as a sole trader or in a partnership is less administration and more agility than a limited company can supply.
“A drawback is that if they meet financial headwinds, then they don’t have the range of protection enjoyed by companies – they have more personal exposure.
“But this doesn’t necessarily mean the worst. If they take action early enough to satisfy creditors including bounce back loan lenders then they can still continue to trade, if viable, and repay their debts while they do it.
“Alternatively, they can take advantage of specific insolvency protection for sole traders or individuals called an Individual Voluntary Arrangement (IVA).
“It operates in a similar way to how a CVA or company voluntary arrangement operates for a limited company allowing them to pay off debt in a series of manageable monthly payments while a proportion of the remaining debt is written off.
“No matter what issues partnerships or sole traders might be facing – if they get professional advice quickly enough, they will have options to change course.”
The bounce back loan scheme might have been a new initiative but the problems if a partnership or sole trader can’t repay it is not.
Even though the scheme was government backed to encourage lenders to be more generous than they might otherwise have been to prospective borrowers, we’re seeing increasing evidence that recovery action is more aggressive and sustained than you may expect.
This is because the government is increasingly demanding evidence from lenders that they have made genuine efforts to recover any debts before they can even begin to apply to have their funds reimbursed.
Given this, if you think you might not be able to repay your bounce back loan or any other borrowing in full, or if you’ve missed payments already – you should get in touch with us as soon as you can.
We offer a free consultation for sole traders or partners where they can outline what issues their business is facing and we can listen and let them know, often to their surprise, that they can take action to save it.
The quicker they act, the more options they will have to choose from and more time to implement them effectively.
The clock is ticking down for creditors actions to be allowed again so why waste any more time?