Could I Be Held Personally Liable for a Bounce Back Loan?
Whether you’re personally liable for a Bounce Back Loan (BBL) will depend on your business structure.
For limited companies
For directors of limited companies, the principle of limited liability generally offers a shield against personal liability for company debts, including BBLs. In simple terms, your personal assets (house, car) are considered legally distinct from the company’s assets.
Consequently, in most cases, directors wouldn’t be held personally responsible for repaying a BBL obtained by the company.
For sole traders and partnerships
For sole traders and partnerships, the situation differs. Because there’s no legal separation between the business and the owner(s), you are personally liable for repaying the BBL in the event of default.
This means your personal assets are at risk if the business cannot meet its repayment obligations.
However, there are also exceptions to these general rules. In certain situations, even limited company directors can face personal liability risks related to BBLs, as I’ll explore below.
Under What Circumstances Could You Face Personal Liability for a Bounce Back Loan?
While the general principle is that limited companies shield directors from personal liability for Bounce Back Loans (BBLs), there are circumstances where this protection may be compromised.
For limited company directors that includes:
Fraudulent applications
If you knowingly provided false information when applying for the BBL, you could be held personally liable. This includes overstating turnover or misrepresenting your business’s eligibility.
Misuse of funds
Using the BBL for purposes not related to the economic benefit of your business may lead to personal liability. This could include using the funds for personal expenses or transferring them to other companies you own.
Wrongful trading
If you continue to trade when you knew, or ought to have known, that there was no reasonable prospect of avoiding insolvency, you may be held personally liable for company debts, including the BBL.
Dissolution of Company to Avoid Repayment
If a director attempts to dissolve the company to avoid loan repayment, they can be personally liable, especially if this action is deemed fraudulent. The Insolvency Service has powers to investigate and may seek to disqualify directors or pursue them for repayment.
Wrongly Obtaining A Bounce Back Loan
This includes applying when your business wasn’t adversely affected by COVID-19, overstating turnover, applying for multiple BBLs for the same business, or applying for a dormant company. Such actions could lead to personal liability, legal action for fraud, director disqualification, or even criminal charges.
For sole traders and partnerships:
As a sole trader or partner, your personal liability is more straightforward. As there’s no legal separation between you and your business, you’re personally responsible for repaying the BBL in the event of default.
However, your main home and primary personal vehicle are protected from recovery action by the lender [1]Trusted Source – British Business Bank – FAQs about About the Bounce Back Loan Scheme.
It’s important to note that if you’re pushed into bankruptcy:
The BBL becomes part of your overall debts in the bankruptcy process.
While your main home and primary vehicle are protected from the BBL lender specifically, they may still be at risk in the broader bankruptcy proceedings.
The Official Receiver or Trustee in Bankruptcy will assess your assets and income to determine what can be used to repay creditors, including the BBL.
After the bankruptcy period (usually one year), you may be discharged from the BBL debt along with other qualifying debts.
In all cases:
It’s essential to maintain clear records of how you’ve used the BBL funds and to be able to demonstrate that all decisions were made in the best interests of the business. If you’re struggling with repayments, seek professional advice promptly to explore your options and protect your position.
Bounce Back Loan Investigations During Liquidation
If your company enters liquidation with an outstanding Bounce Back Loan, the liquidator is duty-bound to investigate the company’s affairs, including how the loan was used[2]Trusted Source – Insolvency Practitioners Association – Reporting misuse of bounce back loans.
Key aspects of the investigation:
Was the Application Honest? The liquidator will check if you provided accurate financial information and met eligibility criteria.
How was the money used? They’ll examine bank statements and accounts to verify the loan was used for legitimate business purposes.
Did the director behave correctly? Your decisions and actions will be assessed, especially around the time the loan was taken and used. They’ll look for signs of fraud, such as overstating turnover or using funds for personal benefit.
If misconduct is found, the liquidator may seek to recover funds from you personally through legal action, such as a misfeasance claim or wrongful trading proceedings. Liquidators must report their findings to the Insolvency Service, which could lead to further investigations or director disqualification in serious cases.
Remember, keeping clear records of how the loan was used is crucial. If there are concerns about how the loan was handled, it’s wise to seek professional advice early in the liquidation process.
References
The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.
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