What happens if you are unable to pay back your Bounce Back Loan?
The beginning of May saw the first letters go out requesting repayment of Bounce Back Loans (BBLs) which were made available by the Government from March 2021. But what happens if you can’t afford to pay back the loan and if you are a company director, could you become personally liable for the debt?
To protect directors from being made personally liable in any case of default, lenders of BBLs were not able to request personal guarantees. The company itself is liable if the loan is not repaid, therefore protecting the director’s personal finances. However, this could cease to be the case if the company director/s are found NOT to have acted “reasonably and responsibly”. But what is “reasonable and responsible”?
Reasonable and responsible:
BBLs can be used to pay staff wages, including directors. They can also be used to help with rents and business rates as well as any monthly business costs or overheads such as phone and electricity bills. But what is NOT considered reasonable and responsible?
Preference
If you used the BBL to repay other loans which were personally guaranteed, loans from friends and family or to pay dividends when distributable profits were otherwise unavailable, this is known as a preference payment and is against the law set out in the Insolvency Act of 1986. Although the Government had temporarily eased wrongful trading regulations (until June 20th 2021) in order to help struggling businesses, preference law still applies.
Non-COVID
Upon applying for a BBL, business owners were asked to formally declare that COVID-19 was the cause of the negative impact their business was facing. They also had to declare that prior to 2020 the company, was “financially sound”. If this information is found to be false, then again Company directors may be made personally liable for the loan, post liquidation.
Misconduct
If BBLs are found to have been used to finance non-business related activities, used incorrectly or fraudulently, and the company subsequently fails, directors will be investigated and potentially disqualified in accordance with The Company Directors Disqualification Act (CDDA) of 1986
For Directors acting “responsibly and reasonably” there are some options to consider:
Payment schemes
There are a number of payment options available – including “Pay as You Grow” (PAYG): the Chancellor has extended the flexibility of BBL repayments with PAYG which will now be available to all from their first repayment, rather than after six repayments have been made. This will mean that businesses can choose to make no payments on their loans until 18 months after they originally took them out. BBL payment holidays and HMRC time to pay arrangements may also be available and can help to relieve the immediate pressure.
Cashflow review and management
Your inability to pay back the BBL may be symptomatic of a cashflow problem. A review of how you can reduce costs, review payment terms and stock levels may help you. You can see tips on how to review and manage your cashflow, here.
Seeking help
If your inability to pay the bounce back loan is actually symptomatic of other more deep rooted problems and issues in your business you’d be advised to seek help from a professional adviser to review your options. In all cases, the sooner you seek help, the more options you have. The earlier we are engaged, the more likely we are to be able to turn a business around, be that be through access to more and better funding, restructuring or other procedures such as a Company Voluntary Arrangement.
For a free initial consultation, please speak to one of our team about how we can help.