An overview of the Bounce Back Loan Scheme
The aim of the Bounce Back Loan Scheme was to enable small and medium businesses to recover from the effects of the COVID-19 pandemic. They offered 12 months of no payments and then 5 years of monthly payments to repay the loan. A company who’s cashflow allowed it could also repay the loan early.
Since the scheme began, more than 1 million bounce back loans have been approved, with more than £45 billion of funding given to businesses. The Government estimated that 2/3 of bounce back loans will never be repaid.
Let’s first look at when you’d need to start repaying your bounce back loan. A business will be expected to make monthly repayments a year after they took out their loan. Since the Bounce Back Loan Scheme launched in May 2020, the earliest this could be is May 2021.
Now, the Government understand that some businesses may be struggling to begin repaying their loan or need more flexibility. That’s why they’ve put additional measures in place to assist, known as ‘Pay As You Grow’.
What options does ‘Pay As You Grow’ give a business?
The ‘Pay As You Grow’ scheme is available to businesses who have accessed the Bounce Back Loan scheme. They allow them to choose one of / or a combination of:
- Extend the length of repayments to 10 years.
- Only pay the interest on the loan for 6 months. You can do this a maximum of 3 times.
- Pause repayments for 6 months (this can only be done once you’ve made 6 months of payments).
What happens if I still can’t pay?
If your business is still struggling to pay, then the banks will begin to chase the repayment of the loan, as they would with any other liabilities due to them. This may include passing the debt to a debt collection agency or a bailiff. They may take court actions such as petitioning to wind the company up.
If the company is not able to repay the loan at all and is in financial difficulty, they may enter into an insolvency scenario (e.g. liquidation or administration). If this happens it’s important to note that the responsibility of the bounce back loan repayment remains with the company. There are absolutely no personal guarantees attached to bounce back loans and the banks can not under any circumstances go to the directors for the repayments.
The funder of the bounce back loan will be an unsecured creditor in the insolvency procedure but they will offset the loan against any credit balances they hold at the time of the insolvency.
Remember that the Government estimated that 2/3 of bounce back loans would never be repaired. You are not alone.
What will an insolvency practitioner do if the company goes into an insolvency procedure?
If your company begins insolvency procedures and you appoint an insolvency practitioner, the first thing they will do is realise all the business assets. These will be used to pay the costs and expenses of the procedure, with any remaining funds to be paid to creditors in a set priority.
If there is anything left for unsecured creditors, this will be shared in equal proportion (usually stated as a p in the £).
The bank who funded the bounce back loan will then claim the shortfall from the treasury, as they can only do this once they have exhausted all other options.
Will insolvency practitioners carry out any investigations into the bounce back loan?
An insolvency practitioner has a duty to ensure that the business that is entering into liquidation or administration used the bounce back loan correctly. To do this they will carry out an investigation into how the bounce back loan was used. This includes but is not limited to:
- Making sure that all conditions of the Bounce Back Loan Scheme were adhered to.
- Making sure that all conditions of the application were met, these being:
- The company was trading before 01.03.2020.
- The company only issued one application for a bounce back loan. Please note that if the company was part of a group of companies, only one of the companies in the group can obtain a bounce back loan, otherwise it is fraud.
- The loan was not obtained in conjunction with CBILS, CLBILS, CLFF loans.
- The business was not in default with any other borrowing arrangements.
- The bounce back loan was used for legitimate company expenses and not for personal use. If it was “borrowed” and paid into a personal account, it will need to be paid back to the company.
- Making sure that salary payments to directors were because they were working for the company and not for a time when they were not working and could have been furloughed.
- Making sure that directors’ salaries only saw justified increases. Directors increasing their salaries as their dividends reduced, is not a justification.
- Making sure that no luxury items were funded. This is fraud.
- Making sure that the bounce back loan was not used for personal use (or to repay directors loans).
The bounce back loans could be used for dividends if there were sufficient reserves. However, if the payment of the dividends was detrimental to the company’s ability to survive, it is likely that these payments would be challenged as misfeasance or a preference.
How We Can Help
Our team is here to help, support and advise you regarding bounce back loan repayments and company insolvency. Please get in touch or call our team today on 01302 965485.