The Bounce Back Loan Scheme (BBLS) has proved a lifeline to many businesses struggling over lockdown. The scheme allows eligible businesses to borrow between £2,000 and £50,000 to cover additional costs for purchasing equipment to protect staff and customers, and to recover from coronavirus-related hardships
Aimed at small businesses, the BBLS give companies access to loans worth up to 25% of its turnover, up to a maximum of £50,000. They are provided interest-free for the first 12 months, with a competitive rate of 2.5% levied afterwards and fixed for up to six years. The government provides security for 100% of the loan amount, lowering the risk to lenders.
Chancellor Rishi Sunak, promised the application process would be swift, with companies able to receive funds within 24 hours of applying. However, so far, the loans have failed to live up to these lofty expectations.
What can a Bounce Back Loan be Used For?
It’s essential that when applying for a Bounce Back Loan, you understand exactly what the funds can and can’t be used for. It’s common for businesses to be more focused on doing everything they can to secure the loan rather than understanding the terms and declarations they must sign, but this can cause problems further down the line.
The Bounce Back Loan must be used to ‘provide an economic benefit to the business’. In practice, that could be to boost cash flow, pay bills and employee wages or buy raw materials and stock. The loan can also be used to pay but not increase director salaries and pay dividends, but only if the balance sheet shows adequate profit to do so.
Importantly, the Bounce Back Loan can also be used to refinance existing borrowing. As it’s such as a cheap form of commercial lending, that approach can make a lot of sense.
What Happens if you Default on a Bounce Back Loan?
It’s not the case that the Bounce Back Loan Scheme will be enough to save every business. In fact, the banks are predicting that up to 40% of Bounce Back Loans may never be repaid. If you take out a Bounce Back Loan that the company cannot repay, then as long as the loan was used for the economic benefit of the company, you don’t have to worry. You were not to know how long the outbreak would last or the impact it would continue to have on your company.
The lenders of Bounce Back Loans are not able to request personal guarantees from business owners. Instead, the government guarantees 100% of the loan. So, if the company fails and enters into voluntary or compulsory liquidation, the lender will get their money back from the government. That protects the director’s personal finances and assets.
Can I Liquidate my Company if I’ve Taken a Bounce Back Loan?
The short answer is yes you can still liquidate your company. Bounce Back Loans are classed as ‘unsecured debt’ in insolvency, which means the financial provider has to wait in line to be paid by the insolvency practitioner who is running the liquidation.
In a usual case, banks and other financial providers have a ‘first lien’ or secured charge over particular assets when it comes to lending significant sums of money. One of the USP’s of the Bounce Back Loan is that this wasn’t the case: lenders were guaranteed their money by the British government meaning they didn’t need to enforce their usual security.
As a company director this means you won’t risk losing personal assets, as would be the case by a typical bank loan secured with a personal guarantee.
Can a Bounceback Loan Be Written Off?
The bounceback loan was a loan to the company, not to you as an individual, even if you are director and sole shareholder. Consequently, if the company goes into liquidation or administration then the loan will be written off as well as the company ceasing to exist. However be aware that if you have used the loan to pay off personal debts then that is is pretty much fraudulent.
There is a false assumption that if the company is unable to recover from the impact of Covid-19 and subsequently enters into a formal insolvency process, then responsibility for repaying the loan will remain solely with the company and liability would not be transferred to directors.
However, this will not be the case if directors have acted improperly and breached their fiduciary duties or abused the loan scheme. While wrongful trading provisions have been temporarily suspended in response to the Covid-19 outbreak, other provisions of the Insolvency Act and Companies Act remain in full force and operation.
Directors need to be mindful of potential misconduct and the issue of ‘preference payments’. Bounce back loans can be used to refinance existing liabilities, but great caution needs to be exercised.
If the company cannot pay back the loan the bank or a liquidator may well investigate where it went and conclude that it was “stolen” from the company. The veil of incorporation will be lifted and you will be personally liable for the debts. In addition you may well be disqualified from being a director of a company. So basically it is not worth it.
Making a preferential payment with Bounce Back loans
One particular area for concern if a company cannot afford to repay the Bounce Back loan is preferential payments. Using the Bounce Back loan to repay borrowing with a personal guarantee attached, may be deemed a preferential payment. Similarly, using the bounce back loan to repay personal borrowing previously lent to a company (e.g. from friends and family), may be deemed a preferential payment.
A liquidator or administrator will look to claim back these preferential payments.
Understanding Bounce Back Loans and director duties
A company director must act properly at all times. A director must use company resources to promote the success of the company, and not for personal means/gain. Where this does not happen and a director acts unreasonably or irresponsibly, misfeasance may occur.
Misfeasance is where a director breaches their statutory and fiduciary duties. It can include purposely or willfully mishandling or misappropriating company funds. The absence of a personal guarantee can make no difference to the risk of personal liability. Proven misfeasance puts a director’s personal assets at risk, and may also result in them being disqualified as a director.
The rules around preferential payments, transactions at an undervalue, fraudulent trading, and misfeasance (for not acting properly) have always been in place. These are all set out under the Insolvency Act 1986.
Could I be Held Personally Liable if I Don’t Pay Back the Bounce Back Loan?
For directors working under the limited company structure you are protected, by the nature of the company structure, from corporate insolvency. This means you have ‘limited liabiliy’ from any debt, unless you have signed what is called a ‘personal guarantee.’
In the case of Bounce Back Loans the same rules apply. One of the key factors of this type of finance was that the Government did not enforce personal guarantees or any form of security. As such, the government simply becomes an unsecured creditor when it comes to the pecking order of creditors waiting to be paid from an insolvent company.
When a company enters a formal insolvency procedure, the administrator or liquidator will investigate the reasons for the insolvency and look at the actions of the company directors in the period leading up to the insolvency. That will include how a Bounce Back Loan was used.
If they find that the Bounce Back Loan was not used in accordance with the terms of the agreement or certain creditors were paid in preference of others, the responsibility for repaying the loan may be passed to the company directors. If they cannot afford to repay the loan, their personal assets may be at risk and they could be made bankrupt
Receive Comprehensive Advice and Support
If you intend to use a Bounce Back Loan to repay existing debts or are concerned about potential personal liability issues arising from a Bounce Bank Loan, please contact our team of licensed insolvency practitioner. We will provide comprehensive advice and support to provide a vital layer of protection.