What happens to a Bounce Back Loan when a company enters insolvency?

Published: 19th June 2022

Bounce Back Loans and company insolvency

The Bounce Back Loan Scheme (BBLS) provided a lifeline for businesses in financial difficulty, but many companies continue to struggle in the wake of the coronavirus pandemic, and are unable to repay their loans.

So what happens to a Bounce Back Loan when a company enters insolvency, and could directors be held personally liable for the outstanding balance?

Will lenders pursue an unpaid Bounce Back Loan if the business is insolvent?

The Bounce Back Loan Scheme offered loans on an unsecured basis, and importantly, didn’t require a personal guarantee from directors. This means that in many cases, if a business fails, the loan will be written off during the liquidation process.

Whilst the company is still operational, however, lenders do chase late and missed Bounce Back Loan repayments in the same way as other unpaid borrowing. This typically involves court judgments, and potentially, bailiff action.

Government guarantee on Bounce Back Loans

The government provided a 100% guarantee for lenders as part of the Bounce Back Loan Scheme. This was intended to encourage lenders to sanction borrowing at the height of the pandemic.

The lender can call on this guarantee if a business becomes insolvent, and the government then becomes a creditor of the company. As a director of an insolvent company, however, your legal obligations to creditors are paramount.

It’s important to minimise creditor losses, and also to be aware of the potential ramifications of failing in this respect. So could you ultimately be held liable for a Bounce Back Loan that your company cannot afford to repay?

Can a director be liable for an unpaid Bounce Back Loan?

There are certain circumstances in which a company director could be held liable for an unpaid BBL when their company is insolvent:

Director misconduct

In some cases directors can be held personally liable for business debts, including Bounce Back Loans, where misconduct is uncovered. Part of the liquidation process involves an investigation into why the company failed.

If the directors are found to have acted negligently or unlawfully, the liquidator can pursue through the courts for repayment if necessary, introducing the threat of personal bankruptcy.

So what might misconduct constitute? It can include, but isn’t limited to:

Misuse of Bounce Back Loan Funds

The government stipulated that coronavirus loan funds must be used for the economic benefit of the business. If misappropriation occurred – maybe you used the BBL for personal purposes – you could be held responsible for repayment.

Fraudulent Bounce Back Loan application

Deliberately providing incorrect information on your Bounce Back Loan application could be viewed as fraud by the Insolvency Service. This might lead to personal liability and disqualification as a director, but potentially also to a prison sentence depending on the seriousness of the case.

Preferential payments

Although Bounce Back Loan funds could be used to refinance, it will be looked at closely by the liquidator when a company enters insolvency. This is to ensure that no preferential payments were made – repaying a family member, for instance, in preference to other lenders. If you’re found to have worsened creditors’ financial position, again, you could face disqualification as a director.

What to do if your business cannot repay its Bounce Back Loan

Begbies Traynor are insolvency specialists and will provide further independent information and guidance. Formally restructuring your company’s unsecured debts may be an option, or extending the term of your loan from six years to 10 years under the government’s Pay As You Grow (PAYG) scheme.

Please get in touch with our partner-led team to arrange a free, same-day consultation. We operate a network of offices around the UK, so you’re never far away from professional support when you need it.

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