In the fallout of the initial national lockdown brought on by the Coronavirus outbreak, many UK businesses have benefited from the financial security of the government’s Bounce Back Loan Scheme.
With some companies continuing to face hardship due to reduced business, directors may find themselves wondering if they could be held personally liable for the repayment of such loans. Here we discuss how the Bounce Back Loan scheme works, and who could be held liable in the event of company liquidation.
What is the Bounce Back Loan scheme?
The Bounce Back Loan Scheme (BBLS) was introduced by the government to help businesses affected by the COVID-19 crisis return to operations more smoothly. It involves loans of up to £50,000 for SMEs across the UK, the interest on which is secured by the government for the first 12 months (followed by a rate of 2.5% fixed for up to 10 years). The loans provide borrowers with a 12-month payment grace period to cope with the current financial climate.
Because the loans are secured by the government, the risk to lenders facing financial difficulty within their business is lower compared to alternatives.
Who is eligible for bounce back loans?
For a company to be eligible for a bounce back loan, it must first confirm a number of declarations. These include:
- Agreeing to the terms of the loan, and subsequent repayment.
- Confirming that the company has been ‘adversely affected’ by the effects of the COVID-19 outbreak and was not in significant financial difficulty prior to 31st December 2019.
Companies who have faced financial difficulty before 31st December 2019 (including administration or debt restructuring) may still be eligible for the loan, although there may be added restrictions.
Can I be held personally liable for my bounce back loan?
Because the government provides 100% security for the loan, there is no need for company directors to supply creditors with a personal guarantee. This is incredibly beneficial for businesses who may be unable to recover from the effects of COVID-19, and may later face insolvency procedures such as Creditors Voluntary Liquidation. In this scenario, so long as the directors are not deemed to have committed wrongful/fraudulent trading, or utilised the loan in an inappropriate way, the liability for the repayment of the debt will lie solely with the company itself. If the funds were used inappropriately, then the Liquidator could potentially pursue you for the money that was not used appropriately.
This means that, in normal circumstances, directors face no risk of personal liability for the amount borrowed through the BBLS. However, if you have any concerns, please contact us for advice.What happens to a Bounce Back Loan in liquidation
What happens if I can’t afford to repay my bounce back loan?
The BBLS was established with those struggling with the financial effects of the Coronavirus outbreak in mind. It is for this reason that the government has provided 100% security on the loans for the first 12 months.
However, after the initial grace period, the responsibility for the loan’s repayment will be on the company. This will take the form of monthly repayments, which will need to be adhered to in order to meet the terms of the loan.
If a company faces a situation in which it cannot afford to repay its bounce back loan, it should be treated just as any other unsecured company debt would be. This would likely see the company needing assistance from insolvency professionals such as ourselves, in order to either organise a re-evaluated repayment plan such as a Company Voluntary Arrangement (CVA) or place the business into voluntary liquidation.
If your company reaches the stage of being unable to meet repayments on any debt, including a bounce back loan, it is crucial to contact us as soon as possible to take action.What can happen if you can’t repay a Bounce Back Loan
How we can help
As licensed and regulated insolvency professionals, we can offer free, impartial advice to companies facing financial difficulty, even if they’ve taken out a bounce back loan. If you fear that your company may be unable to meet the repayments or any other debt, we can help.
- Repaying in affordable instalments
As a bounce back loan is an unsecured debt. Unsecured debts can be included in a Company Voluntary Arrangement (CVA); a formal repayment arrangement, allowing you to pay back your unsecured debts in one affordable monthly payment.
Applying for a Company Voluntary Arrangement
- Company restructuring
If repaying in instalments isn’t feasible, you can put the company into administration. Doing so puts a licensed insolvency practitioner in charge of the company while they make the necessary changes to sell the company to a potential buyer. As with a CVA, creditor pressure is suspended for the administration’s duration.
More on administration
- Closing the company down
Occasionally, the company’s debts may be so severe that recovery isn’t possible. Closing via a Creditors Voluntary Liquidation (CVL) ensures a more structured, orderly process than waiting for your creditors to wind-up the company via a compulsory liquidation.
Applying for a Creditors Voluntary Liquidation
If your company is struggling to repay its bounce back loan, the government’s ‘Pay As You Grow’ repayment flexibilities allow businesses to repay the loans at a more affordable rate.
The Bounce Back Loan Scheme (BBLS) was introduced by the government to assist companies facing financial difficulty because of COVID-19. It provides loans of 25% of a company’s turnover (up to a maximum of £50,000) accompanied by a 12-month payment grace period, which is also interest-free, and 100% secured by the government.
After the initial 12-month grace period, the company faces responsibility for the repayment of the loan through monthly instalments. This is accompanied by a 2.5% interest rate, which is fixed for up to 10 years.
Because there is no need for company directors to provide a personal guarantee for the loans, they will not be held personally liable in normal circumstances. Directors who are found to have participated in wrongful or fraudulent trading are, however, at risk of being made liable for some, or all, of their company’s debts.
Should the company find itself unable to repay its bounce back loan, it is crucial that directors act as soon as possible by contacting insolvency professionals such as ourselves.
Bounce back loans are meant to help businesses with working costs and make up for lack of takings due to the coronavirus.
Initially, CBILS drew criticism, as accessing funds required a guarantee. The need for a guarantee has since been removed for businesses borrowing less than £250,000. Now the Government will guarantee 80% of the funds to the lender while paying interest for the first year.
They can be used for:
- Paying staff, suppliers, loans and running costs (utilities/rent).
- Marketing costs.
- Investment into new production machinery and equipment.
- Maintaining business cash flow.
- Supporting directors’ income.
- Paying dividends without a profitable balance sheet.
- Increasing employees’ salaries.
If you’ve borrowed less than you’re entitled to, you can top-up an existing bounce back loan to the maximum amount of £50,000. Any top-ups must by requested by the time the scheme closes on 31st March 2021.
Thanks to the ‘Pay As You Grow’ repayment flexibilities, businesses can extend the repayment terms from six years to ten, thus halving the number of payments you’re required to make, with interest-only payments for six months. If need be, you can even pause repayments completely for six months.
Your business and personal credit rating won’t affect your ability to apply for a bounce back loan. The loan may show up on a company’s credit file, but it shouldn’t show up on a director’s credit file, or those of any of the company’s employees.
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