The Bounce Back Loan scheme was introduced during the COVID pandemic to help small and medium-sized businesses affected by the coronavirus outbreak. Although the scheme has now closed to new applications, some businesses continue to face financial difficulties and may find themselves unable to repay their Bounce Back Loan.
If you are reading this because your business is struggling to repay its Bounce Back Loan, our director disqualification solicitors can advise you on your position and what you can do next. We will explain the options available, from discussing repayment terms to considering formal insolvency procedures, and help you find a practical, commercially sensible way forward that protects you and your business where possible.
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 2.5% per annum for the remaining term. Neither the company nor the directors were required to provide any security to the lending bank, as the lender benefited from a 100% government-backed guarantee.
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 simply because your company cannot afford the repayments. The government guarantee protects the lender rather than the borrower and does not remove the borrower’s obligation to repay the loan. The Insolvency Service continues to investigate and take enforcement action where there is evidence of Bounce Back Loan misconduct or fraud, which can result in personal liability, director disqualification or criminal proceedings depending onthe circumstances. Sole traders are personally liable for their business debts, including Bounce Back Loans.
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. A Bounce Back Loan may be dealt with as part of a formal insolvency process, but entering insolvency does not automatically mean that the loan is ‘written off’. If a director has misused the loan, they may face personal liability or other enforcement action even where the company itself cannot repay the debt.
Can I negotiate the repayment terms of my Bounce Back Loan?
There is a mechanism in place to renegotiate the terms of your Bounce Back Loan in the form of the Pay As You Grow 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.
You can also contact your lender to discuss your circumstances and whether any other support or repayment arrangement may be available.
Can I sell a business with an outstanding Bounce Back Loan?
It is possible to sell a business with an outstanding Bounce Back Loan. The loan may affect the value and terms of the sale. A lot will depend on the amount still owed, the value of the business’s other assets and the bargaining position of the parties.
If you are selling the shares in a company, the company that took out the Bounce Back Loan remains responsible for repaying it after the sale. The buyer does not become personally liable for the loan simply because they have bought the company’s shares. The parties will need to agree how the outstanding loan will be dealt with as part of the sale.
If you are selling the business’s assets instead, the buyer and seller can agree which assets and liabilities are included in the sale. The company that took out the Bounce Back Loan will generally remain responsible for repaying it unless the loan liability is legally transferred or discharged.
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’s likely that the lender will take action to recover the outstanding amount. This may include 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 may be investigated by the liquidator and, where appropriate, by the Insolvency Service. If misconduct is 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. Depending on the circumstances, misconduct can lead to director disqualification, a compensation order or claim, and, in serious cases involving fraud or other criminal conduct, prosecution. Transactions at an undervalue and preference payments are separate insolvency issues and may also result in recovery action where the relevant statutory conditions are met.
Disqualification proceedings can also result in a compensation order against the director personally.
For a sole trader
A sole trader is personally liable for a Bounce Back Loan because the individual and the business are not legally separate. According to the British Business Bank (which implemented the scheme on behalf of the government), recovery action can’t be taken against their main residence or main personal vehicle. Other personal assets can be recovered though and ultimately the lender could seek to make the borrower bankrupt to recover the debt, which could put assets such as homes and vehicles at risk, so it’s important 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 may be investigated by the trustee in bankruptcy and also by the Insolvency Service. If misconduct is 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 that the restrictions of bankruptcy continue for the relevant period, including restrictions on obtaining credit, and the bankrupt may not act as a company director without the permission of the court.
One option for dealing with the debt is a formal insolvency arrangement such as an Individual Voluntary Arrangement (IVA). An IVA will generally be approved where creditors representing at least 75% by value of those voting agree to it. Once approved, it binds creditors who are entitled to vote, subject to the rules governing which debts can be included.
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 a company, can consider a formal insolvency procedure called a Company Voluntary Arrangement. It is very important that these are not entered into lightly though, as if they fail, the debts remain and creditors may be able to take further action.
If you think you will find it impossible to repay your loan, then you may need to consider the insolvency route. You should take professional advice from an insolvency solicitor before embarking on this action, to ensure you understand the consequences and any potential personal liability.
Pay As You Grow scheme
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 are genuinely struggling, by way of the Pay As You Grow 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).
These options can reduce monthly repayments or give you more flexibility in repaying the loan, but using one or more of them can mean paying more interest overall and, if you take a repayment holiday, increasing the length 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 continues to take action against 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.
A court can make a disqualification order, and a director may also give a disqualification undertaking accepted by the Secretary of State:
- 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 struggling to repay your Bounce Back Loan, don’t ignore the problem. The sooner you address your financial difficulties, the more options may be available to you. Our experienced solicitors can assess your circumstances and advise on the most appropriate way forward.
If you are facing a claim from a liquidator or an investigation or enforcement action by the Insolvency Service, we can help. Our director disqualification solicitors have many years of experience advising directors on disqualification proceedings and other insolvency related claims.
If you are concerned about your Bounce Back Loan or your position as a director, our solicitors can advise on your options.
