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What to do if you can’t pay a bounce back loan

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.

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 6 years. The amount available was based on the company’s turnover, and a company was allowed claim a maximum of 25% of turnover up to a maximum loan of £50,000, at a low interest rate which was guaranteed by the Government.  No interest was charged for the first 12 months and neither the company nor the directors were required to provide any security to the lending bank, this was guaranteed by the government.  Applications for the loan were based on self-certification.

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?

This is very unlikely. The government are pursuing borrowers personally in several ways if they are a director of a company or a sole tradership that failed to pay a loan and are taking a hard line on offenders.

Current 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.  However, if you have misused the bounce back loan, then you are likely to be personally targeted even if the debt falls under an insolvency write off. 

Limited liability business - What are the consequences of not paying back a bounce back loan?

If a bounce back loan is not paid, then it is likely that the lender will take action to recover this, and this may include putting the company into liquidation.

The general position is that directors enjoy limited personal liability if their company goes into liquidation.  However, 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 or administrator.

Some examples of misconduct are: providing false information on a loan application, using the loan for personal benefit, or dissolving your company to avoid repaying the loan.

For the director

If misconduct is found against a director, then it may be that they will have to repay the loan personally.

A director is also likely to be targeted for directors disqualification for misconduct, which would be typically trading to the detriment of the crown, or entering into transaction at undervalue, or a preference transaction 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 the business

Your company may be wound up if it fails to repay a bounce back loan.

What happens if a sole trader can't pay a bounce back loan?

If a sole trader business 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 does.

However, while they can be made personally liable for a Bounce Back Loan, according to the British Business Bank, which implemented the scheme on behalf of the government, recovery action cannot be taken against a main residence or main personal vehicle. However, other personal assets can be recovered and ultimately the lender could apply for bankruptcy to recover the debt, and the pursue the residence and vehicle.

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 against you using other methods.

What are my options if I’m struggling to pay back the bounce back loan?

The first thing to do is to seek legal advice from an insolvency solicitor, they will be able to tell you what option is best for you based on your 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 without misconduct, then this may be the best way of leaving behind this 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 have 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 6 years up to 10 at the same interest rate of 2.5%.

You can ask to reduce your monthly repayments for six months by paying interest only. This option is available up to three times during the term of their Bounce Back Loan

You can ask to take a repayment holiday for up to six months. This option is available once during the term of their Bounce Back 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 are 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, or if there have been persistent breaches of the companies legislation relating to the failure to file returns or account or other document. They can also do so 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’ experience dealing with disqualification and other insolvency claims against directors.

About our expert

Eleanor Stephens

Eleanor Stephens

Senior Recovery & Insolvency Solicitor
Eleanor Stephens is a senior insolvency solicitor with over 20 years' specialist knowledge in all aspects of insolvency, both corporate and personal, covering contentious and non-contentious matters.

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