A great many Bounce Back Loans were never going to be repaid in full, and a substantial share of the £47 billion lent under the scheme has been written off or claimed on the government guarantee.
For many directors the loan was what kept the business going. Years on, some of those businesses have not made it, and the question that follows is whether the director can be made personally liable for the balance.
Read on to discover more about where the law stands around personal liability for BBLS, and what your options are.
What Was the Bounce Back Loan Scheme?
The Bounce Back Loan Scheme (BBLS) was introduced in May 2020, after criticism that the Coronavirus Business Interruption Loan Scheme was not getting money to small businesses quickly enough. It closed to new applications on 31 March 2021, having lent around £47 billion across roughly 1.5 million loans.
The scheme let a company borrow up to 25 per cent of turnover, capped at £50,000, with no interest and no repayments for the first 12 months and 2.5 per cent fixed after that. No personal guarantee was required. The government guarantee behind the loan runs to the lender, not to the borrower: if the company defaults, the lender is covered, but the debt is still owed by the company.
Company Directors’ Liabilities for Bounce Back Loans
Perhaps the most appealing aspect of the Bounce Back Loan Scheme for small businesses is the absence of any requirement for company directors to provide a personal guarantee.
If a personal guarantee is signed for borrowing and the business subsequently enters into a formal insolvency procedure such as a creditors’ voluntary liquidation (CVL), the director could be pursued by the lender for repayment of the loan. That could put their personal assets, including their home, at risk depending on what’s been listed as security.
With a Bounce Back Loan, there’s no personal guarantee to sign, so the lender has no guarantee to call on against a director if the business fails. That does not put personal assets beyond reach. If a director breaches their duties or breaks the rules on how the loan could be used, a court can order them to repay money or contribute to the company’s assets.
What can a Bounce Back Loan be Used For?
The restrictions on what a Bounce Back Loan could be spent on still matter, because they are the terms a director is measured against if the company later fails. Many businesses signed the declarations without reading them, focused on getting the money in. That is exactly the problem that surfaces years later, when a liquidator goes through the bank statements.
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. It could not be used for personal purposes. A normal salary for work done can be a business cost. A dividend is only lawful if it is paid out of profits available for distribution, and a dividend funded from loan money is likely to be examined as possible misuse if the company later fails.
A Bounce Back Loan could also be used to refinance existing business borrowing. The refinancing still had to give an economic benefit to the business, and that is the test a liquidator applies later.
An Undertaking in Difficulty
One of the declarations in the Bounce Back Loan application asked whether the business was an ‘undertaking in difficulty’ on 31 December 2019. That is a state-aid test, not a test of whether the company was solvent when it applied.
A business that was in difficulty on that date could still borrow, but had to confirm it met additional state-aid limits. The scheme had no viability test beyond self-certification.
As the British bank makes clear on their website ‘The borrower is 100% liable for repaying the loan and any interest.’
When Could a Director be Made Personally Liable for a Bounce Back Loan?
A Bounce Back Loan remains the company’s debt. If the company goes into liquidation (or, for some claims, administration), a court can order a director personally to repay misapplied money or contribute to the company’s assets. Two of the grounds are set out below. Others include wrongful trading: carrying on trading after a director knew, or ought to have concluded, that there was no reasonable prospect of avoiding insolvent liquidation or administration. A director has a defence if they took every step they ought to have taken to minimise the potential loss to creditors. The Insolvency Service can also seek disqualification and a compensation order, including where a company was dissolved to avoid repayment.
- Payments are made to creditors ‘in preference’
When a company is insolvent or close to it, its directors must take the interests of its creditors as a whole into account. Once insolvent liquidation or administration is unavoidable, those interests come first.
If it uses the Bounce Back Loan to make payments to certain creditors and not others, it could be seen as creating a preference. An example is if the loan is used to repay debts that are secured with a personal guarantee while unsecured creditors are left unpaid.
Alternatively, debts owing to connected creditors such as family members may be repaid while outstanding tax liabilities are ignored.
- The funds are not used in accordance with the loan agreement
Company directors could also face personal liability issues if the funds are not used in accordance with the loan agreement.
For example, using the Bounce Back Loan to pay a director’s personal debts or buy personal assets gives the company no economic benefit. Buying property is only acceptable if it is a company asset that benefits the business. Repaying money the company owes a director (a director’s loan account) can be challenged as a preference to a connected person if the company later goes into liquidation or administration.
In a liquidation, the liquidator can bring a misfeasance claim over money misapplied in these ways. A repayment of a director’s loan account can also be challenged as a preference by a liquidator or an administrator. The court can then order the directors to repay the money or compensate the company.
How are Directors Made Personally Liable for Bounce Back Loans?
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, they can ask the court to order a director to repay the money or compensate the company. The court sets the amount, and it is paid into the insolvent estate for all creditors, not to the lender. If a director cannot pay what the court orders, their personal assets may be at risk and they could be made bankrupt.
HMRC has already provided a form to fill in here, if they discover some of these conditions apply.
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 Back Loan, please contact our team of licensed insolvency practitioner. We will provide comprehensive advice and support to provide a vital layer of protection.
Read More: Bounce Back Loans and Liquidation: What You Need to Know