What is a Bounce Back Loan?

As Bounce Back Loans (BBL) carry no personal guarantee liability, defaulting on the loan doesn’t have the same personal impact on a director as other loans that usually have a requirement for a personal guarantee. That being said, there is a lot of scrutiny being placed on the defaulted loans by the banks and government.

In the first instance, the banks will adopt their usual recovery methods such as debt collection letters and potential court action which could lead to bailiffs attending your premises.

Although this process could take time due to the volumes of unpaid Bounce Back Loans, its still important to remember that ‘doing nothing’ doesn’t meant the problem will go away. Additionally, if your company is trading insolvent, then Directors have a statutory responsibility which brings about further issues.

Bounce Back Loans were originally offered over a six-year period, with no repayments due for the first 12 months. The government agreed to cover the interest payable during the first 12 months of the loan period. As most Bounce Back Loans were taken out over a year ago, for most, the initial payment holiday now over. Now that payments are falling due there are a lot of companies now facing an unaffordable monthly cost.

The pandemic has caused untold business disruption and due to levels of uncertainty and damage to businesses this has left many unable to meet the monthly bounce back loan repayments. At the time Bounce Back Loans were initially taken out, most business expected a short disruption to their business in the knowledge that once they return to full productivity, and the time the repayments fall due, they will be experiencing normal trade volumes and can therefore meet the repayments. However, most did not anticipate another year of restrictions and this has left many businesses unable to survive.

There has been an amendment to the Bounce Back Loan scheme to enable help to companies unable to repay their loans. This is known as the Pay As You Grow (PAYG) directive which is designed to provide additional time to assist with the repayment of the Bounce Back Loan.

The PAYG scheme aims to help in three ways, depending on the level of support an individual company requires:

1. Companies are able to extend the initial 12-month payment holiday for an additional six months. During this period, interest will continue to accrue meaning companies who take advantage of this option will end up paying more back over the life of the loan.
2. The Bounce Back Loan term can be extended from six years up to ten years. By spreading the repayments over a longer period this will reduce the monthly repayment amount, although this will cost more over the life of the loan.
3. Interest-only payments can be made for six months. This will allow companies to save money on repayments during these months while ensuring no additional interest will be charged.

Please be aware that a litmus test for Insolvency is a business that cannot pay its debts as and when they fall due. Being unable to repay the Bounce Back Loan would fall into this category. There are implications on Directors inside an insolvent business and the responsibilities this carries.

It is important to therefore seek the advice of a Licensed Insolvency Practitioner. Taking steps to act quickly enables you to protect the interests of your creditors and provides you with earlier options which may allow your business to be saved rather than faced with closure.

If you find that due to the pandemic your business is no longer viable and is struggling to repay its debts then you will need to think about closing down the business usually via a Creditors Voluntary Liquidation (CVL). You will need to utilise the services of a Licensed Insolvency Practitioner who’s duty will be to realise any assets for the benefit of the companies creditors.

The Bounce Back Loan is an unsecured debt of the company. As this loan is secured by the Government, then the banks will approach them to recover the amounts owing to them.

One of the areas that will be investigated by a liquidator is how the Bounce Back Loan was used inside your business.

If funds were not used for the normal trading of the business such as purchasing stock or paying business overheads then company directors could be made personally liable for the Bounce Back Loan as this would be classed as misfeasance.

Similarly, if you used the monies to repay a previous loan that had a personal guarantee attached to it, this could be seen as a preference and a direct attempt to remove the personal liability risk of the previous loan.

If the company is or becomes insolvent, you are legally obliged to act in the best interests of the creditors at all times. If you have made repayments to some creditors and not others then this can be seen as ‘preferential payments’ that could lead to you being made personally liable for the company’s debts.

Furthermore, if Bounce Back Loan monies have been taken from the business and used for personal benefit, this would also be an area r risk and something a liquidator would look to recover. The Insolvency Service is taking a very dim view on these methods and unless monies are repaid then they will seek to take disqualification proceedings against Directors.

In summary, providing the Bounce Back Loan monies have been used correctly and for the purposes intended then you will not have issues should you seek to place the company into liquidation.