Rishi Sunak’s Bounce Back loan scheme has been used by over a million businesses since the beginning of COVID 19, and the number is still growing.
While the hope is that the Bounce Back Loans will serve their purpose and allow those companies to survive a difficult period and come out intact, there will also be those which don’t make it.
This article explores the question of what happens if you can’t pay back the bounce back loan, covering the implications for your company and the directors.
Do you Have to Pay Back a Bounce Back Loan?
Of course the finance providers, and HMRC itself, expect you to pay back the bounce back loan if it’s possible for you to do so.
The loan scheme terms were generous and flexible to make the loans supportive as possible during COVID-19.
With an interest rate of only 2.5% per annum, and a loan term of 6 years, these loans had the most relaxed eligibility criteria UK businesses have seen in a long time.
As of February 2021, the government also offers the option to:
- 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 payment holiday
Do Bounce Back Loans have to be repaid?
The short answer is yes, the borrower is 100% liable to pay this loan back.
The actual protocol by which lenders will follow up loan defaults does remain a little unclear.
Current government recomendations are for the accredited lenders to follow their normal debt collection procedures, 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.
Will a Bounce Back Loan be Written Off if I don’t Pay it Back?
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.
Seek advice from a licensed insolvency practitioner such as ourselves if you are considering liquidation and would like to know more about the process.
Liquidating with a Bounce Back Loan
Anyone working out of the limited company structure is automatically protected from having business debt spill over into personal finances.
Assuming there’s no corporate misfeasance or wrongful trading, you can liquidate your company and walk away from debt.
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.
What Happens to the Bounce Back Loan if the Company Goes Bust?
One of the unique points about the Bounce Back Loan Scheme is that they were all guaranteed by the UK government. So in the case of a company going bust, the financial provider who offered the loan will be compensated by HMRC.
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.
What about Personal Liability for 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 repurcussions, 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 repurcussions HMRC have in mind for those who have misused Bounce Back funds, we will update this page as more information becomes available.
Can I use a Bounce Back Loan to Pay Off Debt?
If a company is insolvent, directors have a statutory responsibility not to prioritise any one creditor over another. By paying off one creditor (perhaps one that carries a personal guarantee) directors do risk laying themselves open to charges of wrongful trading, a civil offense that does come with the possibility of being held personally liable for business debt.
If you’re in any doubt, simply make contact with us to explain your situation.
Can’t Pay a Bounce Back and Need Expert Advice?
Our expert licensed insolvency practitioners can offer you free and confidential advice right now via live chat, phone or email. Let us explain your options and the possible routes out of debt.