If you’ve taken a bounce back loan to support your business during the pandemic, but are now realising you can’t pay it back, you’ll be wondering about the consequences.

This article explores the question, covering the implications for your company and the directors.

As insolvency practitioners, we offer support to company directors in just this situation, and can offer clear advice and positive solutions to bounce back loan challenges.

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Can't Pay a Bounce Back Loan to HMRC

Principally aimed at small and medium-sized enterprises (SMEs), the Bounce Back Loan Scheme (BBLS)  was one of the primary measures by which the UK government attempted to support businesses in financial difficulty during the COVID-19 pandemic.

In addition to furlough, VAT and rent deferrals, plus restrictions on statutory demands and winding up petitions, this government-backed loan scheme meant:

  • Businesses could borrow up to 25% of their turnover or a maximum of £50,000
  • Loan terms of up to 6 years
  • No credit checks were taken on eligible businesses
  • No interest of any kind for 12 months. then interest rates of only 2.5% per annum
  • The loans did not require a personal guarantee, rather the government guaranteed the loan for the banks

Pay as Your Grow Scheme Amendment

As of February 2021, the government also offers the option to use a ‘Pay As You Grow’ scheme:

  • extend the loan term up to 10 years, at the same 2.5% rate if you’re struggling to make monthly repayments
  • have up to 3 x 6 month periods of interest-only repayments during the loan tenure
  • request a single 6 month repayment holiday

While certain professional bodies including the Association of Accounting Technicians have suggested the Chancellor should simply forgive bounce back loan debt, there is no evidence yet this will happen. Their letter pointed out that the write-offs would save the taxpayer money via ridding the government the obligation to make loan repayments.

So What Happens if you Can’t Afford to Repay a Bounce Back Loan?

If you can’t afford to pay a bounce back loan, here’s what you should expect to happen:

  • Defaults will be logged on your credit record
  • Banks have suggested that bounce back loan defaulters may be precluded from seeking other finance from them in the future.
  • You will receive a default letter from the bank, as per their normal process
  • Over time, the bank may escalate towards debt collection and court action, though individual financial providers will differ in their policies
  • Directors can liquidate the company without personal liability, assuming loan funds were used legitimately

If you can’t afford to repay a bounce back loan, you won’t lose assets, such as your house, since the loans were not personally guaranteed. Nor will default affect your credit score.

Banks will chase in their normal fashion for loan defaults. HSBC, as one example, has reputedly assigned 400 staff to its collections team to discuss payment holidays, the possibility of interest-only repayment periods and extending loan terms to make it easier for people.

Current government recomendations are for the accredited lenders to follow ‘appropriate recovery processes’, using the Court where necessary. Whether it will be possible for the lenders to pursue as many bounce back loan defaults as are likely in the coming period remains to be seen.

As per the terms of the BBLS itself, lenders are required to offer a 12-month time limit after they have issued a formal demand on the borrower to pursue outstanding amounts.

What Happens to the Bounce Back Loan if the Company Goes Bust?

For company directors facing insolvency, the question will be whether the bounce back loan will be written off along with other business debt.

The answer is yes – liquidation means an end to all business debt, as well as the company itself, of course.

For the director, the loan is simply written off, as per the normal rules of a company liquidation.

Since no personal guarantees were required with this type of loan application, there should be no personal liability, barring the exceptions laid out below.

What may be impacted is your ability to borrow money in the future since, as with any loan, any default will be logged on your credit record. Some lenders have intimated that they wouldn’t lend in the future to someone who defaulted on a bounce back loan.

Seek advice from a licensed insolvency practitioner such as ourselves if you are considering liquidation and would like to know more about the process.

Liquidations must be carried out by a licensed insolvency practitioner and all the creditors, including the financial provider of the BBL, will be paid in order of priority from what funds the liquidator is able to realise from assets.

COVID Business Support

Personally Liability & Bounce Back Loans

Directors who applied for bounce back loans were all asked to confirm that their limited companies were not insolvent at the time of taking the loan.

Assuming this was true, and the loan funds were then used legitimately for the purposes laid out by the government, there should be no chance of personal liability or other repercussions, as these were unsecured debts.

The execption to this would be with certain CBILS (Coronavirus Business Interruption Loan) for which certain lenders did insist on personal guarantee for up to 100% of the loan amount. No BBL scheme lenders required guarantees though which makes it far simpler.

However, insolvency practitioners have a requirement to investigate the company’s position prior to insolvency. Where evidence is discovered that directors made false claims on their application, and knew the company was already insolvent, the liquidator will be required to declare to this to HM & Revenue.

It is not yet clear what repercussions HMRC have in mind for those who have misused Bounce Back funds, we will update this page as more information becomes available.

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