What happens to my bounce back loan during liquidation or administration?

A crucial part of the government’s coronavirus support package for businesses was the Bounce Back Loan Scheme (BBLS), which was introduced to provide emergency funding for those affected by the pandemic.

It has been a popular scheme with a high uptake among SMEs keen to take advantage of the loan scheme’s many benefits, not least of which are the government-subsidised interest payments.

With so many businesses experiencing financial distress due to Covid-19, however, you may be wondering what happens to your Bounce Back Loan if you have to enter liquidation or administration.

Does it have to be repaid regardless of the company’s position, are you at risk of personal liability, or can a Bounce Back Loan be written off alongside other company debts?

What is a Bounce Back Loan?

Bounce Back Loans offer support for businesses experiencing cash flow disruption due to coronavirus. They’re fully backed by the government to reduce the risk for lenders, and encourage lending.

No repayments need to be made for 12 months from the start of a Bounce Back Loan, and the loan interest is also covered by the government for the first 12 months. The scheme has been extended until 31st January 2021.

If you have a Bounce Back Loan and enter liquidation

The economic consequences of coronavirus have been devastating, with businesses that were previously in excellent financial health taking drastic steps simply to survive. So if your company has entered liquidation, what happens to your Bounce Back Loan?

The Bounce Back Loan is an unsecured loan, and so the lender becomes an unsecured creditor in the liquidation procedure. Liquidation is a terminal process that means the end for a company, and any unsecured debts that cannot be repaid are written off.

The Bounce Back Loan and company administration

Entering company administration may offer other alternatives, and doesn’t necessarily end in liquidation. It’s essentially a rescue process that facilitates formation of a defined plan for the future of a company.

For example, administration could result in a restructure of the company’s debts within a Company Voluntary Arrangement (CVA). This is a formal agreement that benefits the company, allowing them to pay a single affordable monthly repayment that’s negotiated by the administrator. The Bounce Back Loan can form part of this new agreement, and the business may then return to trading as normal.

Personal liability and Bounce Back Loans

The Bounce Back Loan Scheme was part of a specific initiative by the government to support businesses and the economy during the coronavirus pandemic, and is backed 100% by the government.

Unlike the Coronavirus Business Interruption Loan Scheme (CBILS), which was only partially government-backed with some lenders demanding personal guarantees, a Bounce Back Loan requires no such guarantees from directors.

This means you’re protected from personal liability for repayment unless there are other underlying circumstances that come to light following investigation. Whilst wrongful trading provisions have, at times, been temporarily suspended in response to the COVID-19 outbreak other provisions of the Insolvency Act and Companies Act, such as fraudulent trading or antecedent transactions (e.g., preferences or transactions at undervalue) remain in full force and operation. Such actions could be challenged by the appointed insolvency practitioner and could, if proved, lead to personal liability.

It’s also important to note that Bounce Back Loans are being scrutinised very closely in liquidations at present. In some cases, the director(s) are being reported by the lender on grounds of the company not being solvent as of 31st December 2019 - one of the prerequisites of obtaining a BBL.

Seek professional guidance

If you believe your company is heading towards liquidation and you’re concerned about an unpaid Bounce Back Loan, it’s vital to obtain professional assistance from a licensed insolvency practitioner (IP). You should cease trading immediately and prioritise your creditors’ interests if you believe you’ve entered insolvency, or will become insolvent in the near future.

If the business cannot be rescued and has to enter liquidation, it’s preferable to do so voluntarily via a Creditors’ Voluntary Liquidation. Although it does mean permanent business closure, you may be able to claim redundancy and other statutory payments as a director.

Begbies Traynor are insolvency specialists, and will provide the professional support you need at this time. We can quickly assess your company’s financial position and present any appropriate options for rescue and recovery, or act as liquidator if the business is no longer viable. Please contact one of our partner-led team to arrange a free confidential consultation – we operate an extensive network of offices throughout the UK.