The Bounce Back Loan Scheme (BBLS) was introduced by the government following complaints that the Coronavirus Business Interruption Loan Scheme (CBILS) was not getting support to the businesses that needed it quickly enough.
Whether the BBLS has been successful in that aim is a matter for debate, but it has given small businesses access to more than £14bn since it was launched on 4 May 2020.
Under the scheme, businesses can borrow up to 25% of their turnover up to a maximum of £50,000. The loans are interest free and are 100% guaranteed by the UK government. However, these attractive terms have led to rumours that some company directors have been misusing the loans. If they have and their business fails, they risk being made personally liable to repay the loan.
There’s no Requirement for a Personal Guarantee on Bounce Back Loans
One of the reasons the Bounce Back Loan Scheme has been so attractive to many small businesses is the fact that there’s no requirement to provide a personal guarantee. The government guarantees 100% of the loan, which means if the company fails, the lender will get its money back from the government.
That’s unlike the Coronavirus Business Interruption Loan Scheme, where the government provides a guarantee for 80% of the loan amount. Many of the banks then seek a personal guarantee from company directors from the remaining 20%. In that case, if the business fails, the lender could pursue the company director for repayment of that 20%, and their personal assets, such as their property or vehicles, could be at risk.
So There Aren’t Any Personal Liability Issues with Bounce Back Loans?
Unfortunately, it’s not quite as simple as that. There is a false assumption among some directors that if the company cannot recover from the impact of Covid-19 and subsequently fails, the liability will not pass to the company directors. However, that’s not always the case.
The Bounce Back Loan must be used ‘to provide an economic benefit to the business’. If it’s not and the company cannot afford to repay the loan and subsequently enters into a formal insolvency procedure, there is a risk that company directors could be made personally liable for the repayment of the loan.
What Can Bounce Back Loans be Used For?
The loan must be used to provide an economic benefit to the business. That could include any number of things, from making efficiencies, improving working capital and boosting cash flow to paying bills and paying salaries (but not increasing them).
It has even been confirmed that the loan can be used to refinance existing borrowing, and it’s so cheap compared to standard commercial lending, that this could be an effective way to reduce the business’s costs in the longer term. However, company directors must take care and seek professional advice if they plan to use the money for this purpose. We explain why in more detail below.
What Can’t Bounce Back Loans be Used For?
There are rumours that Bounce Back Loans are being misused by some businesses. For example, there have been reports of directors buying personal assets, investing in property, paying dividends when the company does not have adequate profit to do so and paying off directors’ loan accounts. If the company fails and enters into an insolvency procedure, this is where personal liability issues could arise.
When Could Directors be Made Liable for Bounce Back Loans?
- When payments are made in preference
Although company directors are permitted to use Bounce Back Loans to refinance existing debt, they must take great care when doing so. The risk is that they could make ‘preference’ payments, by repaying some creditors rather than others.
For example, 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. In this case, if the company were to 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
You might have read that wrongful trading provisions have been temporarily suspended during the coronavirus outbreak. That is to allow directors to continue trading even when their company is financially distressed without the risk of becoming personally liable for the business’s debts. However, the rules on misfeasance still apply.
If a business enters into a formal insolvency procedure, the administrator or liquidator will 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 you be Personally Liable for a Bounce Back Loan?
If you are considering using a Bounce Back Loan to repay existing company debts, or your company is failing and you are concerned you could be made personally liable for repaying the loan, get in touch with our team of licensed insolvency practitioners. We will help you understand your options, reduce your risks and provide the peace of mind that you’ve made the right decisions for you and your business.