UK banks have warned that between 40%-50% of companies will default on their Bounce Bank Loans.
For many company directors, the Bounce Back Loan was their last chance of saving their businesses and emerging from the pandemic unscathed. However, with many businesses still likely to fail, some directors may start to worry whether they could be made personally liable for repayment of the loan.
Read on to discover more about where the law stands around personal liability for BBLS, and what your options are.
What is a Bounce Bank Loan?
The Bounce Back Loan Scheme (BBLS) was introduced by the government in response to criticism that the Coronavirus Business Interruption Loan Scheme (CBILS) wasn’t getting funds to the small businesses that needed them quickly enough.
Using the scheme, companies can access loans worth 25% of turnover up to a maximum of £50,000. The loans are interest-free for the first 12 months and are underwritten by the UK government. Crucially, that means personal guarantees do not have to be given by company directors to secure the funds.
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 there’s no risk to their personal assets if the business fails. However, that is subject to certain conditions, including upholding your director’s duties and adhering to the rules about how Bounce Back Loans can be used.
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.
An Undertaking in Difficulty
One of the key clauses in the bounce back loan agreements ask directors to confirm that theirs is not an undertaking in difficulty. As per the Insolvency Act 1986 this is defined as:
- a company that cannot pay its debts when they fall due
- the value of the company’s assets is less than the amount of its liabilities
This part of the loan document asks directors to confirm that their business is viable, and that they are not simply taking the money with the foreknowledge that the company is insolvent or close to it.
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?
Company directors could be made personally liable for the repayment of a Bounce Back Loan if the business enters into a formal insolvency procedure such as administration or liquidation and the directors have done one of two things.
- Payments are made to creditors ‘in preference’
When a company that’s struggling financially is at risk of becoming insolvent, it must act in the best interests of its creditors as a whole.
If it uses the Bounce Bank 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, if the company directors use the Bounce Back Loan to repay personal debts, invest in property or repay a director’s loan account, there is no economic benefit to the company.
In that case, it is an act of misfeasance and the directors could face personal liability for repayment of the debt.
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, 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.
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 Bank Loan, please contact our team of licensed insolvency practitioner. We will provide comprehensive advice and support to provide a vital layer of protection.