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.

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Defaulting on a Bounce Back Loan

Aside from the low-interest rates, the Bounce Back Loan Scheme (BBL) ‘s main allure was that it didn’t require personal guarantees. This will make defaults significantly more likely.

No personal guarantees mean that, for or directors of limited companies, you are protected by the limited liability inherent in the LTD company structure.

If you default or don’t pay the BBLS loan, the lenders will have their loss compensated by the government, as HMRC 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 potential 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.

COVID 19 Insolvency and Rescue Guide

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. You should clarify this 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:

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)
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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 following 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 committed 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 process, 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 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.

Article sources

All of our insolvency content is written licensed insolvency practitioners. The primary sources are listed below. Learn more about the standards we follow in our editorial guidelines here.

  1. Insolvency Practitioners are suggested to report potential cases of Bounce Back Frud here:
  2. Insolvency Service takes action against businesses abusing COVID-19 financial support –