Can’t Pay Back Your Bounce Back Loan?

Please read below our brief on how to react when you can’t pay back your bounce back loan.

IMPORTANT: The UK Government guarantees repayment of bounce back loans. If the loan defaults due to insolvency, company directors can only reimburse the outstanding amount if a fraudulent claim is made.

Rishi Sunak introduced a scheme to help UK businesses bounce back from the current Covid19 Coronavirus Pandemic in May 2020.

It is called the “Bounce Back Loan Scheme.” Many UK businesses applied for the loan, but many cannot repay the loan due to the extended period of the pandemic and fear the consequences.

Many of you are worried they will not repay the Coronavirus loan. What should we do if we already know that our company cannot repay it?

HBG Advisory advises you why you do not have to use all bounce back loans if you can’t repay your creditors as soon as they are due. To do so may expose you to trading while insolvent.

In the following, we explain your options if you cannot repay, and how it affects you as a director and your business.

What happens if you default on your bounce back loan?

No significant repercussions if you default to repay your bounce back loan. You won’t lose any assets, and it will not directly affect your credit score either. In the first place, credit checks are not mandatory for application to the loan scheme.

However, banks may consider defaults on a bounce-back loan in the future when applying for a loan. 

The UK government also instructs bank lenders to recover loan payments following standard procedure. They also affirm they made clear these loans are repayable, not grants. Furthermore, bank lenders are still the ones to make the final decision regarding the approval of the loan.

Participating Banks will chase for unrepaid Bounce Back Loans in much the same way as they seek to recover any other unsecured loan involving:

• Debt collectors; 
• Court action, and 
• Bailiffs.

The UK Government and those banks that made bounce-back loans. May consider forming a panel of debt collection agencies that would all follow an agreed code of conduct, as lenders only claim the 100 per cent guarantee from the government once a debt collection agency has exhausted the repayment process

Please read what happens if you can’t pay back your bounce back loan ?

What is the Bounce Back Loan scheme? 

Bounce back loan scheme ceased on March 31st,2021. In the first 12 months after receiving the loan, it offered business loans up to £50,000 with zero interest, and then fixed at 2.5% after that period, while allowing up to 10 years of repayment. The loans accommodated borrowers with a 12-month payment non-payment period to help businesses survive the pandemic financially.

The UK Government made sure lenders did not provide security, as the Government acted only as a guarantor.

Can’t Pay Back Your Bounce Back Loan, and the declarations you confirmed.

Let’s say companies can’t repay the loan, it’s in financial difficulties. Then when you applied for a BBL, you were asked to declare various questions. The loan was subject to your agreement. Therefore, once a limited company enters liquidation, a licensed insolvency practitioner is required to examine your declaration for fraudulent claims.

When applying, business owners had to declare that COVID-19 was officially the main cause of negative impact on their business. That the company was “financially secure” before 2020; however, if found, this information is false, and the business is in difficulty. Directors remain exposed to personal liability through the liquidation process.

A BBL was not a gift from the UK government, but a loan to a viable business, not one, as described below.

What is a ‘business in difficulty’?

A company is in trouble when it falls into one of the following tests on 31 December 2019:

• Individuals or companies exposed to “collective insolvency proceedings”;
• Limited companies that have lost more than half of their share capital in their last financial year do not apply to SMEs less than three years old.
• Apart from limited companies, they have accumulated more than half of their capital in their last annual accounts. However, this does not apply to SMEs less than three years old;
• If your business has received any form of rescue and has:
  • Has undergone a restructuring process;
  • Has a loan associated with a rescue strategy still outstanding;
  • Concluded the guarantee.
• A company in the last two accounting years:
  • Possess a debt to equity ratio’, higher than 7.5;  
  • Your business ‘EBITDA’ interest coverage ratio has fallen below 1.0.

Can I liquidate with an unpaid bounce back loan?

Yes!

For further in-depth reading, please view, can I liquidate with an unpaid bounce back loan?

Can’t pay back your bounce back loan due to an extended pandemic?

The BBL came with the conditions attached. Nevertheless, the COVID19 coronavirus pandemic has extended further than originally expected since taking the loan. Therefore, the original conditions of the loan may not be achievable. Directors, though, may not abuse the loan and use it for reasons other than what The British Bank lent it for. If this is the case? Then company directors must seek advice.

Those who fail to take advice promptly may therefore face trouble. In law, it is not a defence to not know what to do. So try to picture direction as an insurance policy.

Knowing your company can’t pay your bounce back loans.

‘Please avoid trading while insolvent and use the bounce back loan, knowing that you will not pay your business creditors, wages or the costs of liquidation’.

The press has suggested many applications for a bounceback loan could be illegal. Hopefully, this is not the case, as it will take many years for the economy to recover from the present Coronavirus COVID19 pandemic.

However, it is therefore essential that directors do not hold back seeking advice if they are unable to pay creditors. By doing so, you protect creditors’ interests and themselves from wrongful trading. The pandemic has gone longer than expected and has impacted many businesses. Hanging on is dangerous and may affect your relationship with your company bankers if you miss a payment.

Can’t Pay Back Your Bounce Back Loan and Missing repayments?

Failure to fulfil payment terms on the agreed date triggers lenders to take the following measures, which will have severe consequences for you in the future. The lender may:

• Cancel all or part of the loan and their obligations;
• Demand immediate repayment of all or part of the loan.

Lenders must inform the borrower in advance of their intentions and allow the opportunity to correct the problem (if you can fix it and your business is feasible). Failure to do so means the lender will commence the above steps.

Failure to meet the repayments agreed further worsens your position, as the lender reports late payments to credit companies, including Experian and Equifax, which affects any prospects of borrowing money, leases or lending applications with suppliers.

Being a Sole Trader and can’t pay back your bounce back?

Sole traders are unlike limited companies. With a Limited Company, directors’ finances and liabilities under normal trading circumstances remain separate. Only on occasions of fraud, wrongful trading, misfeasance, or personal guarantees can a director be held responsible for all or part of their company’s debts.

However, a sole trader is the sole legal entity and does not have any limited liability. Therefore, remaining unable to pay back the loan requires the trade to either go bankrupt or arrange an Individual Voluntary Arrangement supervised by an Insolvency Practitioner to repay the Bounce loan off or percentage over a period. An IVA remains a legally binding agreement between the individual and their creditors.

Checking if your Limited Company is insolvent

Two simple tests determine if your limited company is insolvent:-

• Cashflow insolvency – is when a limited company remains unable to pay its debts as and when they fall due. Usually, when creditors send a demand for payment which they can’t pay.
• Balance Insolvency – when a limited company has liabilities, especially those payable within 12 months greater than its assets.

Will Bounce back loans be written off?

Bounce back loans lent to limited liability companies remain the liability of the company, not you as a director, as limited liability companies remain separate legal entities. Therefore, if the limited company enters administration or liquidation, the insolvency practitioner shall write off the loan. Nevertheless, remember that if you have used the loan to repay personal debt or paid preference payments to your friends, as previously advised, a liquidator will reverse any payments, and you may be held personally liable. The appointed liquidator investigates events and transactions authorised by the directors before their appointment. Suppose that preference payment was issued and proved. Furthermore, liquidators may remove the protection of a limited company (Corporate Veil). Therefore, exposing directors to the limited company’s liabilities leads to unlawful trading claims and potential director’s disqualification. 

Reports say 40% of companies remain unable to repay the loan. The Federation of Small Businesses (FSB) is to grant small businesses a time-limited amnesty under which Bounce Back Loans would be written off in exchange for all-employee equity stakes vested in EOTs – a vehicle defined by Schedule 37 of the 2014 Finance Act. In that case, private lenders write the Bounce Back lenders, then write off and claim 100 per cent guarantees. wE AWAIT FURTHER NOTICE

Are Bounce Back Loans required to be repaid?

Yes, 

When you applied for the BBL, you agreed to repay the loan as a condition of the agreement.

However, it remains unclear how banks chase loans unpaid.

The UK government sanctions request UK banks to adopt their traditional methods to collect Back Bounce loans. However, the task size is yet quantified, as over 1.6 million loans were approved, lending over £75 billion to UK businesses. 

Bounce back loan usage for a company?

You may not use Bounceback loans to pay:

• Borrowers cannot use it for any purpose, except other than business-related purposes;
• To pay into a personal savings account to accrue interest;
• Shareholders Dividends.

Using the bounce back loan incorrectly is deemed not to act as a company director reasonably and responsibly. A point that will bite directors back if the company enters an insolvency process.

However, directors may use the loan to pay:

• Director’s Salaries;
• Company staff salaries & wages; 
• Company directors may pay more expensive company debts, saving money on reduced interest charges;
• Monthly operational costs of the business;
• Business rates; 
• Business Property Rent; 
• Overheads: 
  • Phone; 
  • Electricity & Gas bills.

The meaning of acting “reasonably and responsibly” as a Company Director?

Suppose you used the bounce back loan to repay any loans you introduced, or pay dividends or drawings when the company cannot pay regular suppliers or creditors. Payments of this type are a preference. Doing so is illegal.

Paying creditors ahead of other company creditors.

The Bounce Back Loan (BBL) Scheme terms specify the loan may be used for existing company debt and refinancing it. Note though; care is required when doing so. 

Should your business be insolvent in the future? As a responsible officer of a company, you are then obliged to protect the interests of the company’s creditors. 

Let’s assume that repayments are paid to certain creditors, not to others. As a director of the company, you risk paying preferential payments, which could lead to you being liable for the company’s debts and struck off as a director.

A preferential payment to a creditor of the company may be:

• Repaying a loan to a connected party of the company, 
  • Like a member of the companies board 
  • Friend or 
  • Family relative. 
• Simultaneously, other unsecured creditors, like HMRC, remain unpaid. 

Preferential payment may also be giving an asset of the company as a payment for a debt.

Limited companies which commence insolvency proceedings remain subject to the censure of their former payment transactions, particularly leading up to the appointment of the insolvency practitioner. Let’s assume the IP proves any wrongdoing with either the BBL application or the way borrowers used the money. Then borrowers can lose the protection of personal liability and face the risk of repaying the loan personally. 

The Insolvency Service examines transactions to decide whether you should face a director’s disqualification order for up to 17 years if proven guilty.

Please read 1986 Section 239 Insolvency Act if you are concerned about any actions you have taken, and ring HBG Advisory to plan forward on 0800 612 5448.

Bounce back loan declaration

Suppose businesses are unable to pay back their bounce back loan. In that case, the declarations made at the application stage remain reviewed by the appointed insolvency practitioner, and your actions are carefully considered.

Upon applying, business owners legally declared COVID-19 was the cause of their business’s negative impact. Before 2020, the company was not facing insolvency or legal issues for unpaid debt. A false declaration by the company exposes directors to personal liability.

Money laundering and bounce back loans

When you originally applied for a bounce back loan. The bank has a legally duty to carry out confidential reporting if they suspect money laundering or other fraudulent activity to the National Crime Agency,

Additionally, other professionals you may deal with, like solicitors, other finance houses, car dealers, and your accountant, remain legally obliged to report fraud or money laundering if suspected without advising you. 

Options remain available if your company is unable to pay the bounce bank loan back?

If it is your bounce back loan you are struggling to repay, then help may be possible. 

The Chancellor extended the loan’s versatility, available to all businesses from their first repayment. Therefore, companies can defer payments on their loan for 18 months.

The banks rolled out bounce back loans in May 2020, requiring repayments commencing in May 2021.

However, suppose the inability to pay the Bounceback loan is indicative of your business suffering a cashflow predicament while also having other issues on payment with creditors of the business and HMRC. Therefore, you should consider your company’s options. Commence communicating with HMRC to consider a time to pay arrangement sooner than later. 

Meet with an Insolvency Practitioner and consider the insolvency restructure process. 

Options include:

• Company administration and
• Company voluntary arrangement CVA. 

However, if your company is no longer viable, protect creditors’ interests from further harm. Then a liquidation through a Creditor’s Voluntary liquidation may be perfect. For further reading on creditors voluntary liquidation, please read:

• Liquidation and bounce back loans.

Pay As You Grow, your bounce back loan.

‘Pay as You Grow‘ is now available to over 1.4 million UK businesses.

The UK Chancellor has made sure that support will continue to help businesses and allow a further six months before repayment begins;

Bounce back loan borrowers now can tailor payments suited to their circumstances.

This option is available to all businesses commencing their first repayment (instead), then after six repayments paid.

Pay as You Grow borrowers to extend their loans from six to ten years (reducing monthly repayments by almost half) and pay interest payments for six months to adapt their repayment plan to their circumstances.

The option ‘Pay as You Grow‘ is open to 1.4 million businesses across the UK who borrowed nearly £45 billion using the ‘Bounce Back Loan Scheme’.

The UK government has also agreed to cover the interest costs of the Bounceback loan in the first twelve months.

Pay as You Grow helps borrowers tailor repayments to their financial circumstances.

They are allowed additional time and flexibility to pay back the loan.

Lenders therefore contact borrowers to provide information on repayment schedules and how to access flexible repayment options.

Rishi Sunak acknowledges UK businesses continue to experience the pandemic impact, and the Government remains determined to support them through the ongoing pandemic.

Pay as you go affords UK businesses with:

• Stop repayments for up to six months;
• Pay interest payments up to six months, which allows the option to do so three times over the extended loan period;
• Extending the period to ten years rather than six.

These repayment options allow companies to recover from the Coronavirus COVID19 pandemic before repaying loans.

How do I stop my business from going out of business?

Since 2020 and the impact of the Coronavirus COVID19 pandemic, many UK business owners have asked how do I stop my business from going bust. Businesses operated as a Limited Company. You are protected as directors, as your finances are separate legal entities. As a sole trader, you are the same. Matters are further complicated if a partnership, as you have no limited liability unless a Limited Liability Partnership llp.

Further, as a partnership, you are jointly and severally liable. Now that we are into 2021, and over a year since the start of the pandemic. Three lockdowns on, many businesses face failure, and yet help is available, providing business owners with help.

Common mistakes causing business failure:

• Not understanding the working capital requirement of your business from the start;
• Insufficient management of your businesses cashflow;
• Failure to prepare financial data to manage the business, allowing you to steer your business through challenging and changing times;
• You are not focusing on your business’s core activity, therefore spreading resource and cash too thin;
• Having a limited client base who may control your business or even be its downfall if they fail;
• Failure to agree on a business plan which you may flex as the business grows;
• Market no longer exists (EG, Video Hire).

So what steps are needed to secure my business?

Remember when you first started your business? The vision you had then is perhaps the critical factor in saving your business, if it can be viable in the future, and its market still exists? So:

• Start back at the business basics. Be honest and analyse the problem. Perhaps it is not you, but the service sector you offer, or even the product type or brand?
• Then analyse your operational costs and sit down with your accountant to verify them and how you may trim them without affecting your business detrimentally. One cost you may wish to review is the cost of financing your business, including overdraft fees, loan cost and leasing?
• Once you have carried out the above, revisit your accountant, and rather than use their service for historic, ask them to work with you and provide actual live data on your business’ performance. 
• If the situation is critical and you are unable to repay your bounce back loan and other creditors, like HMRC? Then seek advice from a licensed Insolvency Practitioner immediately. Do not delay, for if you are a director of a limited company, you have directors duties & responsibilities to consider. If not, then delays may impact you as a sole trader or partner. 

Economic Support by the UK Government during the COVID19 pandemic.

Since the Coronavirus pandemic, the UK government directly supported the UK economy with £285 billion and rising. The ongoing pandemic has affected many businesses, and the economic downturn has severely affected directors and their companies.

However, companies must not trade on in an insolvent state, knowingly creating further debt to the detriment of the company’s creditors.

Many fear the outcome of the liquidation of their company with a bounceback loan. Therefore, seek advice early, as the Government has guaranteed the Bounceback loan, and borrowers may only be liable if their initial claim was fraudulent.

Can’t pay back Bounce Back Loan – UK Business Angels Association?

The UK Business Angels Association (UKBAA) is the national trade association for angel and early-stage investment in viable companies.

Fraudulent claims for Bounce Back Loans?

Slowly, HMRC is being brought to the attention of fraudulent claims relating to Bounce Backs Loans. It is estimated that over £30 billion ponds were claimed incorrectly. Banks are freezing accounts they believe are fraudulent.

Arrests in a £6 m bounce back loan scam have taken place since the turn of the new year, as reported by the National Crime Agency.

Any company director concerned about legal liability if they have to close their limited company but have an outstanding bounceback loan should contact HBG Advisory. Usually 9 times out of 10, there is nothing to worry about

How to Avoid Personal Liability for Bounce Back Loans?

The Bounce Back Loan Scheme is intended to help small businesses financially impacted by the Coronavirus COVID-19 pandemic and unable to pay their company’s debts. However, even with this additional funding, companies still fail, and company directors could be concerned about the possible consequences of the loan.

Notably, a Bounce Back Loan will not prevent you from liquidating your company as normal. As long as the loan has been correctly used, the company’s debts will be repaid from the sale of assets, and any remaining debt will be written off. The insolvency practitioner will commence an investigation, but as long as you have fulfilled your director’s duties and the Bounce Back Loan has not been misused, you should not have any issues.

Please contact HBG Advisory on the details below to set aside your worries over bounce back loan repayment.