Lockdowns in 2020 and early 2021 due to the coronavirus pandemic hit many businesses across the UK hard. To help small businesses that were, and are, struggling to survive due to Covid-19, they were able to apply for funding via a Bounce Back Loan Scheme introduced by the Government in May 2020. The loan allowed small businesses to borrow up to £50,000 with no repayments for a year and no interest charged on the amount during that time either.
Approximately a quarter or all UK businesses applied for a Bounce Back Loan, totalling £47 billion, according to the National Audit Office. 90% of loans were taken out by small businesses that have a turnover of less than £650,000. However, the Department for Business, Energy & Industrial Strategy, who manage the scheme, estimated that 37% of all Bounce Back Loans won’t be repaid. With many Bounce Back Loans now beyond their initial repayment-free, interest-free 12 month period, or reaching that time, what happens if a company can’t either start or continue to make its repayments?
What is the Bounce Back Loan Scheme?
The scheme was introduced by the Government in May 2020 to help businesses struggling due to Covid-19. Banks and building societies wishing to get involved in the scheme were accredited by the British Business Bank (BBB) and backed by the government.
Businesses are able to apply for the Bounce Back Loan (the scheme was originally due to end on 31st March 2022 but has been extended to 30th June 2022) up to £50,000, or 25% of their total turnover (whichever is the lower figure).
The loan has to be paid back within six years, although it could be paid back earlier without the company incurring a penalty fee. The attraction to this loan for companies is that no repayments are required for the first 12 months. In addition, interest is not charged on the loan amount for that period either. After 12 months, the interest is 2.5% annually.
It is an unsecured loan and therefore companies did not have to put up any collateral to secure the loan. However, whilst the company doesn’t lose an asset should repayments not be kept up, defaulting on repayments does affect the company’s business credit rating – directors of the company are not held personally liable for the loan – and may well push the company into an insolvent financial position.
The introduction of the Pay As You Grow (PAYG) Scheme
When the Bounce Back Loan Scheme (BBLS) was launched, ongoing lockdown measures into 2021 were not anticipated and resulted in many businesses with a BBLS hampered even further and continuing to struggle to start repayments 12 months later.
Therefore, in September 2020, the Government introduced the Pay As You Grow (PAYG) Scheme which incorporated a range of BBLS repayment options. The PAYG Scheme is designed to help those with a Bounce Back Loan if they are struggling to make repayments. The options included:
- Deferring repayments for an additional six months from the first repayment date, but interest will be incurred during this extra time period.
- Extending the length of the BBL from six years to ten years; this could potentially reduce the monthly repayments by nearly half.
- Making interest-only repayments for six months, reducing the monthly repayments and ensuring no extra interest is added to the loan.
Defaulting on BBL repayments
At the time of application, businesses submit a declaration that confirms they are solvent, viable (financially sound) and able to pay back the loan. However, a lot can change in 12 months and for many companies, ongoing coronavirus restrictions made it difficult for them to ‘bounce back’.
Whilst the government backs accredited lenders within the scheme, i.e. should a company default on repayments, the bank, building society or alternative lender will be reimbursed by the government, companies that have taken out the loan do not have this backing. Because of the declaration made upon application, any business that continually defaults on repayments and does not take up one of the PAYG options, or another repayment option, is liable to investigation by HMRC.
If, upon application, the business was viable and later suffered cash flow issues, thereby becoming unviable, i.e. insolvent, it should be placed into a voluntary liquidation process. A company that enters a liquidation process is no longer required to make repayments and the BBL will be written off. That said, if the loan was used to repay a director’s personal debts or the director that took out the loan made preference payments to family or friends, the liquidator is entitled to reverse this decision and hold the director liable for the BBL. The liquidator will consider the declaration and the director’s conduct to determine if the declaration made was false or the director acted fraudulently.
Personal liability for a Bounce Back Loan
In general, the BBLS did not have any clause that held a director of the company personally liable for the loan; unlike a similar scheme – the Coronavirus Business Interruption Scheme (CBILS) – where accredited lenders did require personal guarantees. However, there are several exceptions where personal liability is applicable for bounce back loans:
- The BBL was used to settle another loan (with or without a personal guarantee), which could be considered a ‘show of preference’ and therefore fraudulent.
- The BBL was taken out knowing the company was already in an insolvent position (therefore the declaration made on application was false).
- If the company director(s) have committed a fraudulent or wrongful trading offence, or other misfeasance.
- There is evidence that the director(s) abused the loan scheme or used the loan funds inappropriately.
If a company is in the position of not being able to repay a Bounce Back Loan, there are a range of options to consider before entering a liquidation process.
Company or individual insolvency is not something that anyone wants to deal with; however, the sooner a financial problem is recognised, the sooner it can be dealt with and the more potential the company has in recovering. If you are struggling with debt, are considering winding up a solvent company or declaring bankruptcy, contact Simple Liquidation for assistance. For more information on how our professional insolvency practitioners may be able to help your business, contact us today.