The bounce back loan scheme was introduced during the covid pandemic to help small and medium-sized businesses struggling due to covid. Unfortunately, many businesses have not recovered since the pandemic, and they now find themselves unable to repay their bounce back loan.
In this article, insolvency solicitor Eleanor Stephens discusses the options available to businesses that can’t afford to pay their bounce back loan.
Contents:
- What is a bounce back loan?
- Are bounce back loans still available?
- Will bounce back loans be written off?
- Can I negotiate the repayment terms of my bounce back loan?
- Can I sell a business with an outstanding bounce back loan?
- What are the consequences of not paying back a bounce back loan?
- What are my options if I’m struggling to pay back the bounce back loan?
- Did you misuse the bounce back loan?
- How we can help
What is a bounce back loan?
The bounce back loan scheme allowed small and medium-sized businesses to borrow between £2,000 and £50,000 for up to six years with repayments starting 12 months after the loan was received. The amount available was based on the company’s turnover. A company was allowed to claim a maximum of 25% of its turnover up to a maximum loan amount of £50,000. No interest was charged for the first 12 months and the interest rate was low for the remaining term. Neither the company nor the directors were required to provide any security to the lending bank, as this was guaranteed by the UK government.
Applications for the loan were based on self-certification and loans were made on the condition that they were not to be used for personal purposes, but could be used, for example, to purchase a company asset such as a vehicle, if it would provide an economic benefit to the business.
Are bounce back loans still available?
No, the scheme closed to new applications and applications for top-ups on 31 March 2021.
Will bounce back loans be written off?
Bounce back loans will not be written off if your company is still active and the government guarantee only kicks in when the company enters a formal insolvency procedure. In order for the company to continue trading, the loan will need to be repaid or renegotiated and then repaid. The government are pursuing borrowers personally if they are a director of a company or a sole trader who failed to repay a loan and are taking a hard line on offenders.
Government guidance says that if the money your company borrowed is not repaid, your company may be investigated by the Insolvency Service, even if it has been dissolved. The only way to ‘write off’ your loan is to put your company or yourself into a formal insolvency process but if you have misused the bounce back loan, then you are likely to be made personally liable even if the debt is written off as part of an insolvency process.
Can I negotiate the repayment terms of my bounce back loan?
There is a mechanism in place to re-negotiate the terms of the bounce back loan in the form of the Pay as you Grow (or PAYG) scheme, as discussed further below. The scheme allows you to request an extension of your loan term, reduce your monthly repayments and take a repayment holiday.
Whether the lending bank will negotiate any further outside of the PAYG scheme will be answered on a case by case basis although some think this is unlikely.
Can I sell a business with an outstanding bounce back loan?
Yes, it is possible to sell a business with an outstanding bounce back loan and it will be treated as a debt for the purposes of valuing the business which will reduce the price and marketability of the business. A lot will depend on the amount of the outstanding loan, the value of the other assets of the business and the bargaining power of the parties.
If the business is sold by way of a share sale, then in theory the loan will remain in place when the new owners purchase the shares and liability for the loan will pass to them. In reality, most share sales are agreed on a debt-free basis which means that the buyers will want the loan paid off before or on completion of the sale.
If the business is sold by way of an asset sale, the buyer will cherry-pick the assets it wants to buy and leave behind the debt and liabilities of the business with the seller so again, the burden of paying off the loan will remain with the business.
What are the consequences of not paying back a bounce back loan?
For a limited liability business
If a bounce back loan is not paid, then it is likely that the lender will take action to recover the outstanding amount. This may include the repossession of assets, starting legal proceedings or starting a process to put the company into liquidation.
The general position is that directors enjoy limited personal liability if their company goes into liquidation. If a company goes into liquidation having failed to repay a bounce back loan, then the circumstances around the loan will be investigated, both by the liquidator and also by the Insolvency Service. If misconduct was found, then financial action may be taken against a director personally by a liquidator.
For a director
If misconduct is found against a director, then they may have to repay the loan personally. Examples of misconduct include providing false information on a loan application, using the loan for personal benefit or dissolving the company to avoid repaying the loan. If a director is found guilty of misconduct, they are also very likely to be disqualified and found guilty of fraudulent trading, which would be typically trading to the detriment of the Crown, entering into transaction at undervalue or making a preference payment if moving money to themselves or repaying themselves in priority to others. Disqualification claims can also be accompanied by a financial compensation claim against the director personally.
For a sole trader
If a sole trader can’t repay their loan, they will become personally liable for this as they don’t enjoy the benefit of limited liability as a company director may.
While they can be made personally liable for a bounce back loan, however, according to the British Business Bank (who implemented the scheme on behalf of the government), recovery action cannot be taken against their main residence or main personal vehicle. Other personal assets can be recovered though and ultimately the lender could apply for bankruptcy to recover the debt which could put assets such as homes and vehicles at risk, so it is essential to seek legal advice immediately.
If a sole trader is made bankrupt having failed to repay a bounce back loan, then the circumstances around the loan will be investigated by the trustee in bankruptcy and also by the Insolvency Service. If misconduct was found then a bankrupt may be subject to a bankruptcy restriction order, which extends the consequences of bankruptcy for up to 15 years. This means credit is restricted as well as other conditions put in place during this time, and the bankrupt may not be a company director during this time either.
The only way to effectively ‘write off’ the debt is to enter into a formal insolvency arrangement such as an Individual Voluntary Arrangement (IVA). This would require a majority (75% in value) of your creditors to agree the IVA, but if implemented and honoured by you, your pre-IVA debts will all be included and cannot be claimed through other means.
What are my options if I’m struggling to pay back the bounce back loan?
Seek legal advice
The first thing to do is to seek legal advice from an insolvency solicitor, they will be able to tell you which options are best for you based on your individual circumstances.
Individual voluntary arrangement / Company voluntary arrangement
A sole trader can consider an IVA as set out above, and there is a similar scheme for a company, called a Company Voluntary Arrangement (CVA). It is very important that these are not entered into lightly though, as if they fail, you are back to square one and the debts remain to be claimed using the usual routes.
If you think you will find it impossible to repay your loan, then you may need to consider the insolvency route. As long as the loan was taken out and used properly, then this may be the best way of leaving behind the debt. You should take professional advice from an insolvency solicitor before embarking on this action however, to ensure you are not personally prejudiced in doing so.
Pay as you grow scheme (PAYG)
It is fully recognised by the government and lenders that many businesses are still struggling to repay bounce back loans. The impact of covid still remains and will inevitably do so for years to come. Many businesses legitimately took out these loans but are struggling to repay.
The government has introduced some help for those who genuinely are struggling, by way of the Pay as You Grow (PAYG) scheme. Under this scheme you can request:
- an extension of your loan term from the standard six years up to 10 years at the same interest rate of 2.5%;
- to reduce your monthly repayments for six months by paying interest only (available up to three times during the term of the loan);
- to take a repayment holiday for up to six months (available once during the term of the loan).
What is key, is that you don’t ignore problems, and discuss these with your lender as soon as they become apparent.
Did you misuse the bounce back loan?
The government is taking a very hard line on the misuse of bounce back loans, and it is possible to be disqualified as a director even if you have not put your own company into liquidation.
The Insolvency Service can disqualify a director:
- in the context of certain criminal proceedings;
- if there have been persistent breaches of company legislation relating to the failure to file returns, accounts or other documents;
- following an investigation of the company, if it appears that it is in the public interest that a disqualification order should be made against a person who is, or has been, a director or shadow director of a company.
How we can help
If you are having difficulties repaying your bounce back loan then don’t ignore it. The sooner you address the problem, the more options you will have. Our experienced solicitors can look at the best options with you to resolve your issues.
If you are subject to a claim by a liquidator or the Insolvency Service, we can help. Our solicitors have many years of experience dealing with disqualification and other insolvency claims against directors. Please get in touch with us.
