Government Bounce Back Loans and CBILS to fund a company sale – what needs to be considered?

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’”.

Using a bounce back loan or CBILS as part of a company sale:

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…

• The company and the new purchaser(s) enter into a loan agreement for the required amount.
• The purchaser(s) then use the money loaned to them to fund the purchase of the company and on completion this is paid to the seller(s) in line with the terms of the Share Purchase Agreement (SPA).

Both the loan agreement and the SPA would complete simultaneously upon completion of the transaction.

Benefits of using a government backed loan in a business sale:

• It opens the market to a range of purchasers – e.g. current employees who would have previously lacked the funds (or private funding) to pursue a company purchase. Some lenders refer to a management buyout as being a permitted use for the loan.
• The interest rate and payments on the loan are suspended for 12 months, then fixed at a commercially lower rate for the remaining term.
• Flexible repayments - on 24 September 2020, the Chancellor announced new Pay as You Grow measures for borrowers who have accessed the Bounce Back Loan Scheme. The measures provided borrowers with the option to:

- 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.

• The borrower is the company rather than the individuals, which gives a certain layer of protection, although some lenders required personal guarantees with the CBILS.
• The Bounce Back Loan is backed by the Government, so lenders can claim from the Government if it believes ‘no further payments are likely’ from the company.

The Risks & Considerations of using a government backed loan as part of a business sale:

• The terms of the loan will require detailed review to ensure the current directors/sellers would not be in breach of the terms by lending the money to a third party for the purpose of purchasing the company.

• The majority of CBILS lenders will have taken security over the company, in the form of a debenture or charge. Therefore, this may cause issues if a purchaser(s) wishes to defer some of the consideration post completion, as the seller(s) will not be able to have security over the deferred amount (lender is first ranking secured creditor, and rarely agrees to additional secured creditors). Therefore, this leaves the seller(s) unprotected as an unsecured creditor.

• The amount borrowed against the value of the company e.g. if a Company took out a loan for 70% or more of the value of the company, is this realistic to be paid back over the term agreed?

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.

• Another consideration for CBILS - if the company became insolvent in the future (due to this debt that it failed to repay) a liquidator/administrator could look back on all previous transactions (up to 12 years). The use of the loan could be investigated, and an administrator may seek to void the transaction and recover funds from the seller(s) as previous directors.

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.

Reviewing the terms of a Bounce Back or CBILS loan:

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.