What happens to a Bounce Back Loan in insolvency?
Posted on 14th October 2021
The Bounce Back Loan Scheme (BBLS), was introduced by the UK government in the Chancellor of the Exchequer’s announcement on the 27 April 2020. These loans are intended as a business support package to overcome the financial difficulties caused by the COVID-19 pandemic.
Aimed at helping small and micro businesses in all sectors, the loans available were from £2K up to 25% of a business’ turnover, with a maximum loan of £50K. With its government-subsidized interest payments, there was a high uptake of the BBLS among SME’s, with more than 1.4 million UK businesses borrowing nearly £45 billion.
It was predicted that by the start of April 2021, 906,000 of UK businesses were at risk of permanently closing. So, what happens to the Bounce Back Loan if a business faces insolvency?
When a company is liquidised, it undergoes an insolvency procedure in which it is formally closed down. During this process, all of the company’s assets are sold and the proceeds are used to repay any creditors.
As the BBL is an unsecured loan, with no collateral used to secure it, once the company undergoes the liquidation, the lender (UK government) becomes an unsecured creditor. In a liquidation process, any unsecured depts that cannot be repaid are written off.
Entering company administration is an alternative option when a company faces insolvency. The appointment of an insolvency practitioner to act as an administrator, whose goal is to bring about the recovery of the business by forming a defined plan and restructuring the company’s debts.
By entering into a Company Voluntary Agreement (CVA) procedure, a formal agreement is entered into between the company and its creditors. The appointed company administrator can negotiate with the creditors to reach an agreement whereby a single affordable monthly repayment amount is made by the company. Thus, allowing them to continue trading, and hopefully save the company from insolvency. The BBL can also form part of this creditors’ repayment scheme.
For a business to secure a BBL, they required no personal guarantees from the company director(s) to the lenders about their ability to repay the loan. As a result, the borrower is protected from any personal liability to repay the loan.
However, there may be exceptions to this rule if the company in question faces an investigation into wrongful or fraudulent trading or are found to have made any preferential or undervalued transactions. If found guilty of such actions, the appointed insolvency practitioner, the company owner(s)/director(s) would be personally liable for the unsecured BBL.
One of the prerequisites of obtaining a BBL, was that the company borrowing the money was solvent as of 31 December 2019. When undergoing the liquidation process, the practitioners are being particularly vigilant that this was the case, and if it wasn’t, the director(s) are being reported to the lender, which in this case is the UK government.
Seek professional help
If your company is facing liquidation and you are worried about your unpaid government-backed Bounce Back Loan, we advise that you seek professional guidance from a reputable insolvency practitioner. You should also stop trading and start to prioritise your creditors’ repayments.
As a company director facing liquidation, entering into a Creditors’ Voluntary Liquidation (CVL) process, may be a preferential route, as you may be able to claim redundancy or other statutory payments.
Delay your BBL repayment
If you were one of the 1.4 million companies who took advantage of the Bounce Back Loan Scheme, as of the 8 February 2021, you can delay the repayments by an extra six months.
This delay was designed by the government to give businesses greater flexibility in repaying their debt and a better chance of surviving the negative impact of the pandemic-induced shutdowns or reduced trading.
The ‘Pay as You Grow’ scheme allows the borrowers to make no repayments until 18 months after they originally took out the loan and also extend the length of their repayments from six to ten years, which could reduce the monthly repayment amount by almost half. For more information click here.
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Nicola J Sorrell
- Effective Accounting
Founder | Xero Champion | IR35 Expert
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