What happens if businesses cannot repay Bounce Back Loans?

Fri, May 22nd, 2020

Begbies Traynor discuss bounce back loans and answer questions on the scheme...

What happens if businesses cannot repay Bounce Back Loans?
With businesses struggling to survive the financial and economic impact of coronavirus, an extensive government support package has provided welcome relief for some. Following the initial measures, and criticism of the CBILS programme, the Chancellor introduced the Bounce Back Loan Scheme (BBLS) to help small businesses access emergency funding.

This scheme is fully backed by the government, requires no repayments for 12 months, and can be repaid early without penalty, but what are the implications of taking out a Bounce Back Loan if businesses cannot afford to repay in the future?

Is a personal guarantee required for a Bounce Back Loan?
To protect company directors from personal liability in the event of default, the government has prevented lenders from demanding personal guarantees for these loans. If the business declines and becomes unable to pay back the loan in the future, repayment rests with the company alone.

Business lenders typically require a personal guarantee from one or more company directors before lending, which places directors’ personal assets at risk – notably their home – so this is a significant aspect of Bounce Back Loans.
There are instances where directors can still be held liable for repayment of a Bounce Back Loan, however, so it is important to understand the circumstances in which this might happen.

Understanding Bounce Back Loans and director duties
Even though the government has temporarily relaxed the regulations around wrongful trading to help businesses in financial difficulty carry on operating at this time, misfeasance and preferential payment rules remain in place.
Misfeasance is the deliberate or wilful mishandling or misappropriation of company funds by a director, and is a breach of directors’ statutory and fiduciary duties. If proven, it can place their personal assets at risk and result in disqualification from office.

Bounce Back Loans can legitimately be used to refinance borrowing that companies have already taken but it is an area where professional advice is needed, as great caution is required to avoid breaching statutory and fiduciary director duties.

The risk of making a preferential payment with Bounce Back lending
Preferential payments may be a particular concern if businesses cannot afford to repay a Bounce Back Loan. If directors use some or all of a BBL for the purpose of repaying borrowing with a personal guarantee attached, it may be viewed as a preferential payment if the company is liquidated.

A further consideration if businesses cannot repay their Bounce Back Loan at any point is the official declarations that were be made during the application stage. If any declarations are later found to be untrue, the terms and protections provided by the scheme may not apply.

On application, the business owner must formally declare that their business has been negatively affected by the pandemic, and also that it was not experiencing financial difficulty before the end of 2019.

Bounce Back Loan alternatives
Bounce Back Loans are clearly beneficial in many ways, providing the emergency finance so many businesses currently need. Understanding the finer details of how these loans are operated in every circumstance is vital, however, and can help directors avoid unwittingly breaching their fiduciary duties.

There are other options to BBLS for smaller businesses, including the Coronavirus Business Interruption Loan Scheme (CBILS), and alternative funding that uses business assets to generate cash.

If you would like to discuss Bounce Back Loans or any issues affecting your business during these challenging times, please call partner, Keith Tully, at your local Real Business Rescue office in Liverpool to arrange a free same-day consultation in complete confidence.

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