What happens if a company cannot pay a Bounce Back Loan?

As part of measures introduced to support SMEs during the pandemic, in May 2020 the government offered state backed loans known as Bounce Back Loans. Three years on, Julie Hunter of Stephensons explains what happens if you don’t pay a Bounce Back Loan.

What was the Bounce Back Loan Scheme?

In May 2020, as part of the package of measures to provide financial support to Small and Medium Sized Businesses (SMEs) during the COVID-19 pandemic, the government offered state backed loans known as Bounce Back Loans.

These Bounce Back Loans were provided by British Banks to businesses and were fully guaranteed by the government. They were simple and easy to apply for, via an online application process, with few checks required, and were not subject to the normal consumer protections that apply to business banking in that they did not have the benefit of the protection and remedies that would otherwise be available under the Financial Services and Markets Act 2000 or the Consumer Credit Act 1974.

Loans of between £2,000 and £50,000 were available to SMEs without the need to make any repayments for the first 12 months; with no interest payable for 12 months and then accruing at the low rate of 2.5% from month 12 for the remainder of the term.

No personal guarantee or security was required from sole traders or company directors, meaning that only the business which obtained the loan had the liability to repay it. However, the condition of these Loans was that the money was only to be used for the benefit of the business.

Naturally, the Scheme was popular, and it is estimated around £45billion was loaned under it.

As the pandemic wore on, alterations to the Scheme were made, enabling borrowers to extend the period before the first repayments became due and extending the term of the loan for up to 10 years.

The Scheme closed in May 2021.

What happens if you don’t pay a Bounce Back Loan?

The liability to repay a Bounce Back Loan falls on the business or company to which the monies were loaned. Individual directors and business owners are not personally liable to repay the loans. So, if the business fails, ceases to trade, or becomes insolvent, the loan would not be repaid. But if the business continues to trade it remains responsible to repay the loan.

The lending banks have an obligation to recover the monies loaned. Whilst the loans were guaranteed by the government, before the lender can look to it to receive payment, they must first exhaust all efforts to recover the monies from the borrower.

This means banks can instruct debt collection agents and debt recovery solicitors to take steps to recover the loans. SMEs may be faced with county court action and, consequently, county court judgments, followed by enforcement action, typically in the form of the appointment of county court bailiffs or High Court Enforcement Officers.

In a substantial number of cases, Bounce Back Loans made to limited companies will not be recovered, because the companies were either dissolved or became insolvent before the loans were repaid. In these cases, the banks will call upon the government to honour its guarantee and make repayment of the loans.

However, after May 2021 the extent of the fraud committed by individuals obtaining Bounce Back Loans for false purposes became apparent. It was clear that many loans were given to businesses that had not traded pre-pandemic (in breach of the loan conditions), and the money was used for the personal purposes of the individuals behind the business. These businesses were quickly dissolved or liquidated before the loan became due, leaving no prospects of the lending bank recovering the money.

The government reacted, in February 2022, with the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021. This Act came come into force on 22 February 2022 but had retrospective effect. It provided The Insolvency Service with more power to investigate, and if appropriate, take action to disqualify wayward directors and also to discourage the continuation of the practice by giving the court power to order the directors to pay compensation to the unpaid creditors of the company where directors had claimed Bounce Back Loans and then wrongly transferred the money out of the company before dissolving it.

Where companies had been liquidated before repaying a Bounce Back Loan and it appeared the monies borrowed had not been used for the benefit of the company, liquidators employed the powers already granted to them under the Insolvency Act 1986 (Chapter X) to investigate the conduct of directors and the financial transactions leading up to the liquidation. Where improper use of the loans is found, the liquidator has the power to recover the money from the directors personally.

Can you reduce your monthly Bounce Back Loan repayment amount?

Borrowers are able to pause Bounce Back Loan repayments for 6 months during the term of the loan but they can only do this once.

There is a provision enabling borrowers to reduce monthly payments by paying interest only for a 6-month period. This can be done for a maximum of three times over the loan term.

These provisions were introduced in September 2020, as part of the Pay As You Grow scheme, when the government reacted to the obvious difficulties with the Bounce Back Loan Scheme’s requirements for repayments to commence after 12 months when the pandemic continued to cause serious financial difficulties for SMEs.

Can the Pay As You Grow scheme help?

The Pay As You Grow scheme was intended to help alleviate the pressure on SMEs to start repaying Bounce Back Loans 12 months after the loan was taken out.

The Scheme enabled borrowers to:

Extend the term of the Bounce Back Loan from 6 to 10 years, whilst retaining the low 2.5% interest rate across the whole of the term.
Reduce the monthly repayments for 6 months, by paying interest only; on a maximum of three occasions during the term.
Take a repayment holiday, for up to 6 months, on one occasion during the term of the loan.

All of these options were available to borrowers, who were able to apply for this relief within the first 12 months after taking out the Loan, but once all three had been utilised, no further relief was available.

The Bounce Back Loan Scheme closed in May 2021. If a borrower had not applied for the flexible measures provided for in the Pay As You Grow scheme within the 12 month period after taking the Loan, the opportunity to obtain this relief was lost.

About the author

Julie Hunter is a Partner in the commercial & dispute resolution team at Stephensons. She is highly experienced in litigation and dispute resolution matters covering all aspects of commercial litigation, including invoice and asset finance, secured finance, commercial contracts disputes and general litigation.