Directors of UK limited companies are generally not personally liable for Bounce Back Loans (BBLs), as these loans were designed without personal guarantees.
However, personal liability can arise if there is misuse or misconduct. The Insolvency Service investigates BBL use to identify wrongdoing, particularly in insolvency cases. You should use BBL funds appropriately and maintain transparent records to protect themselves.
This guide provides clear advice on how to manage these responsibilities effectively.
The UK government introduced the Bounce Back Loan Scheme (BBL) to provide swift financial support to small businesses during the COVID-19 pandemic. It aimed to help companies manage cash flow disruptions and sustain operations amidst economic uncertainty. A key feature of the BBL scheme is that it does not require personal guarantees, meaning your personal assets are generally protected if the company cannot repay the loan.
Here is a quick overview of the scheme’s main features:
Loan Size: Businesses could borrow between £2,000 and 25% of their turnover, up to a maximum of £50,000.
Repayment Terms: The loans are repayable over six years, with no fees or interest charged for the first 12 months. After that, a fixed interest rate of 2.5% per annum applies.
Government Backing: The government guarantees lenders a 100% guarantee, ensuring they are reimbursed if a business defaults.
This design was intended to minimise risk for you while encouraging banks to lend quickly. However, while personal liability is typically off the table, certain conditions (such as misuse of funds or fraudulent activity) can lead to personal liability, which will be discussed in later sections.
Circumstances That Could Trigger Personal Liability
Directors of companies with Bounce Back Loans (BBLs) could face personal liability if they engage in misconduct. Here are the key scenarios where this might occur:
Fraud or Dishonest Conduct
Fraudulent actions, such as inflating turnover figures to secure a larger loan, can lead to personal liability. If you knowingly provided false information during the loan application process, this could be deemed fraudulent conduct. Such actions not only breach the terms of the BBL scheme but may also result in criminal charges.
Wrongful Trading and Misfeasance
You could be personally liable if you continue trading when you know the company cannot avoid insolvency, known as wrongful trading. Misfeasance, which involves breaching fiduciary duties (such as making preferential payments to certain creditors), can also result in personal liability. Both scenarios highlight the importance of acting responsibly and in good faith.
Misuse of Loan Funds
Using BBL funds for non-business purposes, such as personal expenses or repaying personal debts, constitutes misuse. This misuse can trigger investigations and potential personal liability. You must ensure that loan funds are used solely for the economic benefit of the business.
Personal Guarantees Given Separately
Although BBLs do not require personal guarantees, you might have provided one separately for other company debts. If so, you could be personally liable for those specific obligations. It is crucial to distinguish between BBLs and other financial commitments where personal guarantees might apply.
Insolvency Service Investigations into Bounce Back Loan Use
The Insolvency Service investigates Bounce Back Loan (BBL) transactions when a business enters liquidation or administration to ensure compliance with the scheme’s terms. They focus on identifying misappropriation or negligent handling of funds. Key areas include whether the loan was used for personal expenses, transferred to personal accounts, or used to repay personal debts, as these actions can indicate misuse.
If fraud is uncovered, you may face severe consequences, including disqualification, personal liability claims, or criminal charges. Disqualification can last 2 to 15 years and significantly affect one’s company management ability.
Maintaining transparent records of loan usage is crucial to demonstrating compliance and avoiding these consequences. You should ensure all transactions are well-documented and justifiable as benefiting the business. A thorough investigation can uncover mismanagement or wilful wrongdoing, so seeking early, proactive advice from an insolvency practitioner is essential.
Protecting Yourself and Recommended Next Steps
To protect yourself from personal liability for a Bounce Back Loan, maintain detailed financial records to ensure transparency and accountability. Regularly review your company’s cash flow to stay informed about its financial health. Consulting an insolvency practitioner early can provide valuable guidance if you encounter difficulties.
Consider these preventive measures:
Contact creditors early: Open communication can lead to more flexible repayment arrangements.
Explore refinancing options: This might help manage cash flow and reduce financial strain.
Seek professional restructuring support: Experts can offer tailored solutions to stabilise your business.
Avoid dissolving your company without proper procedures, as this could trigger deeper investigations into your conduct. These steps are preventive measures, not a comprehensive legal solution. If you suspect liability issues, seek professional advice tailored to your situation.
If you’re concerned about whether you could be personally liable for a Bounce Back Loan, our licensed insolvency practitioners and business rescue specialists can explain the rules, outline your responsibilities, and guide you on the safest way forward. Call us free on 0800 074 6757 for confidential advice.
Bounce Back Loan Personal Liability FAQs
Can the bank seize my personal assets if my company defaults on the BBL?
No, banks cannot seize your personal assets if your company defaults on a Bounce Back Loan. The BBL scheme was designed without personal guarantees, meaning your personal assets are generally protected unless misconduct is involved.
What if I used the BBL for personal expenses?
Using a Bounce-Back Loan for personal expenses is considered a misuse of funds. If the Insolvency Service investigates this, it could lead to personal liability, as the loan must be used for the economic benefit of the business.
Could I face personal liability if I dissolved my company without repaying the BBL?
Dissolving your company without repaying a Bounce Back Loan might trigger an investigation. If it is found that funds were misused or directors acted improperly, you could face personal liability.
Will my personal credit score be affected if my company defaults?
Typically, your personal credit score will not be affected by a company’s default on a Bounce Back Loan, as it does not involve a personal guarantee. However, any separate personal guarantees given outside of the BBL scheme could impact your credit score.
How quickly does the Insolvency Service act if it suspects misuse of a BBL?
The Insolvency Service can act swiftly if misuse of a Bounce-Back Loan is suspected, especially during liquidation proceedings. They will investigate your conduct and loan usage to determine misconduct.
