Struggling to repay a Bounce Back Loan?

Published on September 13, 2021 by Tony Chan

Bounce Back Loan Scheme (BBLS) background

The Bounce Back Loan Scheme (BBLS) was introduced to help small and medium sized businesses to obtain finance quickly to survive the challenging times caused by the Covid-19 global pandemic.

Eligible businesses could borrow between £2,000 and 25% of their turnover, up to a maximum of £50,000.

The UK Government provides security for 100% of the loan therefore eliminating the risk to lenders.

There are no fees or interest to pay for the first 12 months. After 12 months the interest rate is fixed at 2.5% p.a. The initial length of the loan is 6 years, although it can be extended up to 10 years.

The BBLS is an unsecured loan agreement between the business and the lender.

The loan can be repaid early without penalty. No repayments are due during the first 12 months.

The BBLS came to an end on 31 March 2021.

According to the latest data published by HM Treasury, £47.36 billion had been deployed to more than 1.5 million SMEs through the BBLS.

Demand letters from lenders and banks

Some businesses have already received letters from banks and lenders seeking repayment of their Bounce Back Loans (BBL). If you are struggling to repay the loan you should speak to the bank or lender to ask for an extension of the loan from 6 years to 10 years. This will help with short term cash flow.

Many businesses have struggled through the lockdowns and have relied on the BBLS to keep afloat during these extremely difficult times. However, with the announcement by the UK Government of the so-called “freedom day” and the easing of all legal restrictions around the re-opening of the economy, businesses from all sectors have had to make all sorts of decisions about the re-opening of their businesses at a time when their financial resources may have been eroded during the lockdowns. Ultimately, the key question on every business owner’s mind is whether or not their business can survive and trade profitably into the uncertain economic future ahead.

More importantly, business owners are now asking themselves how they can repay their Bounce Back Loan and they must now seriously consider the implications if they cannot, bearing in mind their other ongoing commitments such as servicing other loans, tax arrears, bringing staff back off furlough, starting repayment of business rates and settling rent arrears with their landlords.

Directors’ responsibilities

Directors and other business owners should by now have evaluated their financial position. It is important that directors and business owners take a critical review of their Bounce Back Loan and consider whether or not they can repay it and other financial commitments. If it is not possible, there may be no realistic chance of avoiding insolvency.

The Companies Act is clear that whereas a director’s duty is principally to the shareholders, that changes in the event of insolvency when the principal duty is to the creditors.  Great care should be exercised at that stage and directors are advised to seek early and appropriate professional advice from a reputable Licensed Insolvency Practitioner, to avoid worsening the position and potentially attracting personal liability.

Insolvency Service given new powers

The Insolvency Service has been given new powers to target company directors who dissolve their businesses without repaying their Bounce Back Loan.

The Insolvency Service has retrospective powers to investigate directors of live companies or those entering into formal insolvency. If wrongdoing or malpractice is found, directors can face sanctions including a ban of up to 15 years.

Extending powers to investigate directors of dissolved companies means those who have previously been able to avoid their responsibilities may also be held to account.

Commonly asked questions from directors and accountants

These are some of the commonly asked questions on the BBLS. As always, the earlier that directors and other business owners seek advice from a Licensed Insolvency Practitioner, the more options will be available.

Is it possible to voluntarily strike off a company with an outstanding Bounce Back Loan?

No, it is no longer possible for a director to strike off the company at Companies House with an outstanding Bounce Back Loan.

The loan has to be repaid in accordance with the terms and conditions of the signed loan agreement.

If the loan agreement is not repaid when it falls due it is probable that the lender will pursue the business for repayment.

Can directors of a solvent company liquidate it with an outstanding Bounce Back Loan?

Yes, directors can close down a solvent company with an outstanding Bounce Back Loan provided that all its debts, including the BBL, are repaid in full together with statutory interest within 12 months from the start of the liquidation. This process is known as Members’ Voluntary Liquidation.

Can directors of an insolvent company liquidate the company with an outstanding Bounce Back Loan?

Yes, directors can close down an insolvent company if it cannot repay its debts in full including the Bounce Back Loan. This process is known as Creditors’ Voluntary Liquidation.

As the BBL is an unsecured loan of the company it will rank equally with all the other unsecured creditors of company after secured and preferential creditors.

If the company has assets the Liquidator will realise them to maximise the return to creditors in the liquidation according to the order of priority set out in the Insolvency Rules.

What if the company genuinely cannot pay back the Bounce Back Loan?

There is no consequence for the directors as long as the money has genuinely been used wholly for business purposes.

However, if the money has been used for non-business purposes these transactions will be reviewed by the Liquidator or Administrator who may have to reclaim the money

Can lenders or the Government, who provided the security for the Bounce Bank Loan, pursue the director personally for the unpaid balance of the BBL?

The simple answer is “no” as the Bounce Back Loan does not require directors to provide a personal guarantee to underwrite the borrowing. The responsibility for repaying the BBL will remain solely with the company and liability cannot be passed to directors provided they comply with their statutory and fiduciary duties as directors. This means there is no risk to a director’s personal assets should the company be unable to repay the loan.

If there has been an abuse of the process in obtaining or applying the bounce back loan, it is possible for lenders to recover funds from the directors personally.

Can a company use a Bounce Back Loan to pay off other company debts?

If the company is insolvent, directors should seek independent advice from a Licensed Insolvency Practitioner and must exercise caution when using a BBL to repay other company debts.

For example, repaying a personally guaranteed debt while other unsecured creditors remain unpaid is likely to be seen as an act of misfeasance, by way of preferential payment in breach of the Insolvency Act. If proven personal liability may follow.

In Summary

If you or your client are struggling or if you are concerned that your client will not be able to repay their bounce back loan, please contact our Licensed Insolvency Practitioners at Royce Peeling Green for a free, no-obligation and confidential chat.

Our Licensed Insolvency Practitioners have many years of experience in corporate recovery and insolvency and they can provide you with impartial advice and recommendations, entirely without obligation.

Contact us now at  info@rpg.co.uk to explore how we can help you.

Written by Tony Chan

Tony is the Senior Insolvency Manager at RPG incorporating Crawfords. Tony has a wealth of experience in dealing with many types of corporate and personal insolvency procedures in small-medium sized businesses, as well as experience in dealing with more complex insolvency assignments. Tony is a Chartered Accountant and is an Associate Member of R3 – the Association of Business Recovery Professionals. Email: tchan@rpg.co.uk

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