Bounce Back Loans - What to do if you can't pay
Bounce Bank Loans - What to do if you cannot afford to repay them
The Bounce Back Loan Scheme
When the Coronavirus Pandemic hit the UK in early 2020 the Government brought in a series of measures to help businesses survive the unprecedented scenario that they faced.
One measure that the Government brought in was the Bounce Back Loan Scheme, which was introduced in March 2020 and allowed small and medium businesses to borrow up to 25% of their annual turnover, capped to a maximum sum of £50,000.
The loans were offered with a very low interest rate of 2.5% for the entire 6-year term, no repayments had to be made for the first 12 months, and all interest and fees for the first year were covered by the Government. In order to give banks security and confidence to lend money quickly to those who needed it, the Government also provided a guarantee to the banks in the event of non-repayment. This meant that no guarantees or security had to be provided by the borrowing company or its directors.
The issue now is that the initial 12 month payment free period has ended and companies are being required to start making monthly repayments towards the loan. The difficulty that many businesses are finding is that the lockdown and associated restrictions on business have gone on far longer than anyone could have anticipated.
Whilst most companies that took out a Bounce Back Loan in 2020, fully expected business to have returned to normal by the time the first payment fell due, that has not been the reality for many businesses and they are still struggling to survive and rebuild, particularly with ongoing supply shortages, a fuel crisis and rising inflation. As a result, many businesses and companies are struggling with cashflow issues and additional monthly payments for the Bounce Back Loan are hard to make; indeed statistics show that more than two million businesses took out Bounce Back Loans and nearly half of those businesses are expected to have problems repaying the loan.
The Pay As You Grow Scheme
The Pay As You Grow scheme was introduced by the Government in October 2020 to alleviate concerns that many companies were likely to encounter problems when the time came to start repaying their Bounce Back Loans. The Pay As You Grow scheme offered companies and businesses three options to try to assist with the cash-flow pressures that they were now facing, as follows:
The borrower could extend the initial 12-month payment free period for an additional six months. Whilst interest would still continue to accrue this option did give the borrower a further six months before additional cash-flow pressures started to build.
The borrower could extend the term of the Bounce Back Loan to ten years, thus reducing the required monthly repayments.
The borrower could opt to just pay the interest for six months, thus reducing the interest that was accruing.
Banks were encouraged to contact borrowers to provide details of the options available to them to try to assist them as far as possible. For some businesses and companies however these additional measures will not be enough and in reality, unless consumer confidence in business returns, these options, particularly Option 1 will just result in companies “kicking the can down the road”.
What happens if I cannot repay my Bounce Back Loan?
If after reviewing your situation it appears that your company will be unable to repay the Bounce Back Loan then expert insolvency advice from a Licensed Insolvency Practitioner will be required. More information on the signs of insolvency and the options available can be found by clicking on the link.
Once a company falls into arrears with its Bounce Back Loan repayments you should expect the bank to take immediate action and look to recover the debt by making a demand for the entire balance outstanding if the account is not brought up to date within a reasonable time-frame.
Can you write off a Bounce Back Loan?
The Bounce Back Loan is the same as any other loan or liability, and a key benefit of the scheme for directors was that a personal guarantee was not required; instead the loan was guaranteed by the Government.
Accordingly, if a company is placed into a formal insolvency process, and realisations are insufficient to repay the loan, the balance would be written off as part of the insolvency process without any personal consequences for the directors, unless the directors had breached their duties in respect of the Bounce Back Loan scheme, which is addressed further below.
Can I dissolve a company with an outstanding Bounce Back Loan?
Dissolving or striking off a company is not a formal insolvency process but a Companies Act process. It is an informal way to close a company and is really designed for those companies with no assets or liabilities that have ceased to trade for three months although sometimes it can be used to bring the life of insolvent companies, with minimum assets to an end. More information on this process can be found by clicking on the above link.
If you have a Bounce Back Loan that you cannot afford to repay, your company is classed as insolvent and you will have to take some form of action.
If you do decide to go down the dissolution route you should expect your application to be objected to by the Bank if there is a Bounce Back Loan outstanding.
The Government has indicated to the banks that they should object to any strike off application where there is an outstanding Bounce Back Loan. They are also bringing in legislation to allow The Insolvency Service to formally investigate company directors if their company has an outstanding Bounce Back Loan and is struck off. The Insolvency Service normally only investigates director’s conduct when a company is placed into liquidation or administration. More information on this can be found on Purnells’ blog.
A strike off application or dissolution is unlikely to be a realistic option available to directors and their companies where there is an outstanding Bounce Back Loan therefore and alternatives will have to be considered.
If a Company is insolvent, and a strike off application is not available then the following formal insolvency procedures will have to be considered.
- A Company Voluntary Arrangement or CVA is a legally-binding payment plan between an insolvent company and its creditors. The most usual form of proposal is a monthly payment proposal, where a set sum is paid into the arrangement over a three to five year period.
The CVA is dealt with by an insolvency practitioner who will act as the Supervisor of the arrangement and ensures that the company and its creditors adhere to the terms of the arrangement.
Depending on the level of creditors, and the amount that the company can reasonably pay, some of the debt could be written off.
- If a business needs significant restructuring then Administration may be a viable option. Administration provides a company with significant protection from creditor action and allows the Insolvency Practitioner and the Company directors’ time to formulate a plane to improve the outcome for the company and its creditors.
- If a Company cannot be saved, then it may simply have to be liquidated and placed into Creditors Voluntary Liquidation.
A Creditors Voluntary Liquidation is a formal insolvency process, which unlike a Strike-Off Application cannot be objected to by the creditors, as it is the shareholders who pass the necessary resolutions.
More information on these procedures can be found by clicking on the above links.
Is a Director personally liable for a Bounce Back Loan?
The Bounce Back Loan was a Government guaranteed scheme and as such personal guarantees were not required from directors. Accordingly, the starting point is that directors would not be personally liable for a Bounce Back Loan.
If directors have misused the Bounce Back Loan Scheme however there could well be personal repercussions for them, and these can be broken down into three areas.
- Some companies were not entitled to a Bounce Back Loan however directors applied for them anyway. For example if a company had ceased to trade for several years, it is hard to see how applying for a Bounce Back Loan could be justified.
- Some companies may have been entitled to less than the £50,000 maximum but some unscrupulous directors may have artificially inflated figures to enable to their company to obtain the full £50,000.
- The rules regarding the use of the funds received in respect of the Bounce Back Loan were deliberately wide ranging but in essence were supposed to be used for business purposes. If unscrupulous directors used those funds for their own personal benefit, it is hard to see how they could legitimately argue that they were used for business purposes.
It should be noted that using the Bounce Back Loan to pay wages, including those of the director is not necessarily an issue. What we are referring to under this section is for example using the Bounce Back Loan to pay off a director‘s personal mortgage, funding a family holiday, purchasing a new car etc. Spending the Bounce Back Loan in that way is clearly not for business purposes.
The effect of the matters referred to at points 1 to 3 above could be that the director has an overdrawn directors loan account, or has breached his or her fiduciary duty; as such they could become liable to pay back some or all of the funds taken.
Whilst the loan itself is not personally guaranteed, personal liability can, in some circumstances, follow the director. It is very important to take advice on this matter therefore, as it is often possible to correct the position. If there is an overdrawn directors’ loan account, for example, a payment plan could be agreed for that sum to be paid back over a reasonable period.
If you would like a free meeting to discuss Bounce Back Loans, the financial affairs of your company, or any other financial matter please do not hesitate to contact us 01326 340 579 or email us at email@example.com.
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