Trainee Commercial Solicitor, Sophie Perry discusses two government backed loans and the key factors that need to be reviewed by Directors and business owners before using a loan to fund a company sale.
During the Covid-19 pandemic the Government offered various grants and funding options for Companies to take advantage of to ease cash flow pressures, provide funds to help struggling businesses and to aid growth.
The two types of Government backed loans available up until 31 March 2021 were Bounce Back Loans (£2,000 to £50,000) and Coronavirus Business Interruption Loan Schemes (CBILS) (borrowing over £50,000). HM Treasury data suggests 464,393 Bounce Back Loans and 40,564 CBILS were granted during this period.
Many companies took advantage of these loans due to the flexibility regarding security, suspended, fixed or low interest rates and the ability to pay back in the first 12 months interest free. As one client informed us, “we applied for the loan just in case, for a rainy day fund’”.
Looking forward, some companies are contemplating their futures and considering a change in ownership. As a result, Holmes & Hills’ Commercial Law Solicitors have started to see a trend regarding the use of these loans to fund a sale of a company.
How this works…
Both the loan agreement and the SPA would complete simultaneously upon completion of the transaction.
- Extend the length of the loan from six years to ten, at the same fixed interest rate of 2.5%.
- Make interest-only payments for six months, with the option to use this up to three times throughout the term of the loan
- Request a six-month repayment holiday once during the term of the loan.
Although this affects the future of the company, it is important for the Seller(s) to consider this carefully. The seller(s) are the current director(s) who made the decision to loan the money to the purchaser(s) in order to fund the sale of the company and effectively place the company in debt (as seller(s) received this as completion monies) without an asset as such to show for this debt.
Directors must have regard to their general duties in sections 171-177 of the Companies Act 2006 when performing their role. These duties include: to act within their powers, to promote the success of the company, to exercise independent judgment, to exercise reasonable care, skill and diligence, to avoid conflicts of interests, not to accept benefits from third parties and a duty to declare interests in transactions.
Therefore, with this in mind, the director/seller would need to consider if using the loan monies to fund a sale and leaving the company in debt is truly promoting the success and viability of the company.
As these CBILS loans are relatively new, there are limited examples of the extent to which an administrator would seek to recover from previous directors (who they thought had breached their duties) first, before making a claim on the Government guarantee.
If you are considering selling your business with Bounce Back loan or Coronavirus Business Interruption Loan Scheme monies being considered for use as part of funding the transaction, contact Holmes & Hills’ team of specialist commercial solicitors in Essex and Suffolk for expert advice and guidance to ensure your business and personal interests are protected.