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.
The Bounce Back Loan Scheme (BBLS) was introduced by the UK government in 2020 in response to the COVID-19 pandemic. The scheme allows businesses to borrow up to 25% of their annual turnover, up to a maximum of £50,000, at a low interest rate of 2.5%.
Are directors liable for non-payment of a Bounce Back Loan?
As the Covid-19 pandemic continues to cause economic turmoil, many businesses have turned to the government’s Bounce Back Loan scheme for financial support. However, there is some confusion about whether directors are personally liable for the repayment of these loans. The answer appears to be no.
According to the British Business Bank, the Bounce Back Loan scheme is a “100% government-backed loan guarantee.” This means that the government, not the borrower, is responsible for repaying the loan if the borrower is unable to do so. As a result, directors should not be held liable for any non-payment of a Bounce Back Loan.
However, it is worth noting that this guarantee only applies to loans issued through the Bounce Back Loan scheme. Directors may still be held liable for any other debts incurred by their business
When could a director become personally liable for the loan?
As a director, you have a responsibility to act in the best interests of the company. This means that you should think carefully before taking out a bounce back loan from the company account. If you spend the money on yourself, this could be regarded as irresponsible behaviour.
Worse still, if you use the loan to repay personal debts, this could be seen as fraud. If the company then defaults on the loan, the bank or a liquidator is likely to investigate where the funds went. They would probably conclude that the loan was stolen from the company. As a result, you as a director would be personally liable for the debt.
You might also be disqualified from being a director of a company in future. So it’s important to weigh up the risks before taking out a bounce back loan.
It is always important to be mindful of your creditors and make sure that you are paying them all in a fair and equitable manner. While it may seem like a good idea to pay off company debts as soon as you have the funds to do so, you need to be careful that you are not preferential treatment to one creditor over another.
For example, if you use a bounce-back loan to pay off your uncle who lent money to the company a few years ago, rather than paying HMRC or the bank loan, then you are effectively creating a preference. This could come back to bite you later on if the company were to enter into insolvent liquidation, as the liquidator could seek to reverse the transaction at a later date.
Although you may not be personally liable in this scenario, it will still clearly impact you when a liquidator demands money from family members, etc. Therefore, it is always best to consult with a professional before making any decisions about how to allocate your payments to creditors.
Making a preferential payment with Bounce Back loans
One particular area for concern if a company cannot 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.
In What Circumstances Could Directors be Made Liable for Bounce Back Loans?
When payments are made in preference
Company directors are permitted to use Bounce Back Loans to refinance existing debt, they need to take care when doing so. The risk is that they could make ‘preference’ payments, by repaying some creditors rather than others.
If the loan was only used to repay company debts that have been personally guaranteed by a director while other liabilities go unpaid, that would be in clear breach of the director’s duties.
Should the company enter into a formal insolvency procedure such as administration or liquidation, the director could be made personally liable for the debts of the company under the terms of Section 239 the Insolvency Act 1986.
When Bounce Back Loans are misused
If a business enters into a formal insolvency procedure, the administrator or liquidator has a legal duty to investigate the conduct of the directors during the period leading up to the insolvency. If they find that a Bounce Back Loan was not used in accordance with the terms of the loan agreement then the directors could be made personally liable for repayment of the loan.
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.
With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.