As part of our series on bounce back loans we cover the question of what happens if you default on your loan.
A recent report from the National Audit Office suggests that a huge number of businesses will default on the government backed loan scheme, costing the HMRC up to 26 billion.
If you’re a business owner concerned about this, read on to learn more about the consequences and your options.
Defaulting on a Bounce Back Loan
Aside from the low interest rates, the standout fact of the Bounce Back Loan Scheme (BBL) is the fact that it didn’t require personal guarantees. This will make defaults significantly more likely.
No personal guarantees means that, for or directors of limited companies, you are protected by the limited liability inherent in the LTD company structure.
If you default or simply don’t pay the BBLS loan, the lenders will have their loss compensated by the government, as HMRC themselves offered to provide the security for this finance.
However, this doesn’t mean you can simply avoid paying. HMRC is currently due to update their guidance to lenders about the correct methodology for enforcing loan repayments – like so much of the legislation rushed out during COVID 19, there are gaps in the currently offered information about protocols for debt enforcement.
To date, HMRC simply suggests to the lenders that they pursue any loan default via their normal methods, which would include threatening letters, statutory demands, and potentially court action and baliffs. Whether or not the lenders will find this practical or possible to enforce over such a projected volume of defaults remains to be seen.
If the Business Cannot Afford to Pay the Bounce Back Loan
If the business simply can’t afford to pay the bounce back loan, you may have reached the state of insolvency. This is something you should clarify very carefully as the implications are serious.
Insolvency can be defined as not being able to pay bills when due, or having liabilities greater than assets.
Not being able to pay back a bounce back loan would be a strong indicator that you’ve reached this situation, although you should check with your accountant or use our handy insolvency test to be sure.
If you’re insolvent, you as company director will have a statutory duty to put creditors first which means you:
- should seek professional advice from a licensed insolvency practitioner immediately
- should inform yourself about a directors duties during insolvency
- take care not to pay anyone, including yourself
- keep careful notes of any actions taken
If you are simply struggling to meet the monthly loan repayment, but otherwise solvent, the UK government offers the following options:
- You can extend the loan term from 6 to 10 years
- You can take up to 3 periods of 6 months interest free only repayments during the loan term
- You can request a 6 month repayment holiday (only once)
Are you Personally Liable for a Bounce Back Loan?
In principle, the bounce back loan scheme didn’t come with the conventional document asserting personal liability known as a personal guarantee. Thus defaulting shouldn’t mean serious potential consequences, such as bankruptcy, in most cases.
The sister scheme to BBL, the Coronavirus Business Interruption Loan (CBILS) differed slightly in that certain accredited lenders were requiring personal guarantees but no BBL lenders were allowed to do so.
As such, there should be no personal liability, with the follow exceptions.
- Where the loan has been used to pay off another loan (perhaps with a personal guarantee). This is known as ‘showing preference’ and could be construed as fraudulent
- Where the loan was taken out with the knowledge that the company was already insolvent
- If you’ve commited wrongful or fraudulent trading or other directorial misfeasance
- Where there’s evidence that directors abused the loan scheme or used it inappropriately
What Happens to the Bounce Back Loan if Our Business Goes Bust?
If you declare yourself as insolvent and choose voluntary liquidation, you can write off the bounce back loan along with the rest of your company debts.
UK insolvency law gives directors the chance to close their company and start again once the liquidation process is complete.
If you are running a limited company and you feel the debts are becoming overwhelming, a number of options remain available to you. These could include a business rescue processs, such as company voluntary arrangement, or choosing voluntary liquidation if you feel the business is no longer viable.
For a frank and practical discussion about any of these options, make contact with one of our experts at your convenience and we’ll talk you you through the process, timeframes, and costs. We specialise in helping smaller businesses through tough financial circumstances.
If you’re concerned about the potential costs of liquidating, remember government redundancy payments are available for directors, and in some cases can offer a lifeline if you’re insolvent company is being closed down.