Bounce Back Loan Repayments – Deadline

Payments are now due for many of the first adopters of the UK Government’s Bounce Back Loans, launched in May last year.

Background

In response to the coronavirus pandemic in May 2020, the Government launched their Bounce Back Loan Scheme (BBLS) which aimed to help small and medium-sized businesses to borrow between £2,000 and up to 25% of their turnover. The maximum loan available was £50,000. The Government picked up the 2.5% interest usually charged on loans of up to £50,000 for the first 12 months.

A total greater than £46.5 billion was lent by the UK’s banks to small businesses which needed support. Nearly 700,000 businesses pounced early and took loans within the first month of its launch last May. Now, some 13 months later, many of these firms will have to begin paying back these loans, including interest.

The main options available to businesses are:

• Extending the loan period from six to 10 years;
• Pausing interest payments and loan repayments for one six-month period; and
• Paying only interest for three six-month periods.

Guidance

If you are struggling with these loan repayments then there are some “self-help” options in place to assist.

You can extend the period before you need to start paying off your Bounce Back Loan by a further six months. This means you’ll have 18 months before you start paying interest. However, this will result in you paying more as interest is charged from month 12. You can extend your loan period to ten years but you will end up paying more than 2.5 per cent interest. [1]

What happens if I can’t pay back my Bounce Back Loan?

The Government is preparing for two thirds of the Bounce Back Loans to never be repaid. According to the National Audit Office, £26bn of the £45bn Bounce Back Loans issued so far will never be paid off. According to the Business Banking Resolution Service, just over 40 per cent of businesses that have taken out any Government-guaranteed emergency coronavirus loan have no intention of repaying them, either because they do not expect to repay their Bounce Back Loan or because they do not believe that the Government will pursue the debt.

Meanwhile, the lenders themselves are set to scrap plans to establish a separate agency to chase bad Bounce Back Loan debts and handle overdue payments themselves. Technically, there are no serious repercussions if you default on your Bounce Back Loan. You won’t lose any assets and it won’t affect your credit score either (credit checks are not mandatory for the loan scheme). However, banks will come after you for Bounce Back Loan repayments in much the same way as they would try and recoup any other unsecured loan. This could involve dealing with debt collection agencies, meaning threatening letters, court action and possibly bailiffs if you don’t pay.

Can I still liquidate a company with a Bounce Back Loan in place?

A Bounce Back Loan is an unsecured debt in insolvency. If the company must liquidate, the lack of personal guarantees associated with the loan means it’s treated as an unsecured debt. Unsecured debts are rarely paid in full on liquidation and the financial provider has to wait in line to be paid by the insolvency practitioner.

One of the biggest selling points of Bounce Back Loans was that banks and other financial institutions did not have a ‘first lien’ or secured charge over particular assets when it comes to lending significant sums of money. The Bounce Back Loan is secured by the Government and the lender will pursue the Government for repayment in full so they do not need to enforce their security against the borrower.

Unsecured debt is written off once the company is liquidated so you won’t be personally liable and as a company director, this means you won’t risk losing personal assets, as would be the case by a typical bank loan secured with a personal guarantee. Responsibility to repay the Bounce Back Loan remains solely with the company and liability will not be transferred to you as a director or other shareholders, provided you have complied with your duties as a director. This means there is no risk to your personal assets or credit rating should your insolvent company not be able to repay the Bounce Back Loan.

What if your business was already in difficulty?

There is one important caveat to this which is that all of the Bounce Back Loan applications contained a clause asking directors to confirm whether or not ‘on 31 December 2019’ the business was already in difficulty. This clause was added to make directors aware that Bounce Back Loans were not simply free money which could be used by companies already insolvent, but were there to offer genuine support for struggling businesses. During liquidation, a liquidator investigates your company’s financial history leading up to and during the insolvency, and if they find evidence that you have improperly used your Bounce Back Loan or that the money has been siphoned off for personal gain, they could make you personally liable for the debt. Furthermore, if there is money from the realisation of assets the financial provider who made the Bounce Back Loan will therefore be repaid. If not, HMRC will repay the lender, as per the terms of the BBLS.

While HMRC have not made clear what consequences will come of this behaviour, they ask that liquidators report suspicious cases to them and they have provided a specific web address for doing so.

Conclusion

In conclusion, it is important to highlight that the Bounce Back Loans, whilst helpful during the pandemic, must now be paid off. However, the Government are fully aware of the difficulties that companies continue to face and they have put in place various protections, including extensions to the loans and a lack of personal liability as noted above.

Liquidating a company that accepted a Bounce Back Loan but was already in financial difficulty as of 31 December 2019, may not prove to be the end of the matter for company Directors who took BBLS certifying otherwise in the application.

If you would like any further information or advice, please do not hesitate to get in touch with our Debt Recovery team.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.

[1] https://smallbusiness.co.uk/government-bounce-back-loan-for-your-small-business-2552197/