Personal Liability for Bounce Back Loans
If your company defaults on a bounce back loan, could you be held personally liable?
While the terms for these loans were purposefully set to be supportive to directors – hence no personal guarantees – there are certain circumstances in which personal liability might become an issue.
We answer this question in some detail below.
What is the Bounce Back Loan Scheme (BBLS)?
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.
When Could a Director Be Personally Liable for a Bounce Back Loan?
One of the reasons the Bounce Back Loan Scheme has been so attractive to many small businesses is the fact that there was 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 only 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.
However, this doesn’t mean there are zero liability issues with bounce back loans.
The Bounce Back Loan must be demonstrably 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.
If the loan has been used sensibly, however, any liquidation would mean the end of the debt.
Sole Trader Liability
Sole traders do no benefit from what is known as the corporate veil – the legal separation between personal and business finances that the limited company structure offers. As such any debts – including bounce back loans – belong entirely to the individual.
Defaulting on the bounce back loan therefore does render you personally liable, and you’ll need to check the terms and conditions of your particular loan to see what policies the lenders hold in this situation.
Importantly, the British Business Bank has clarified that ‘no recovery action can be taken over a principal private residence or a primary personal vehicle’ for sole traders that have defaulted on bounce back loans.
– If the loan has been used sensibly there should be no personal liability, even in insolvency.
– An insolvency practitioner will be looking for evidence that the loan has been demonstrably used ‘to provide an economic benefit to the business’.
In What Circumstances Could Directors be Made Liable for Bounce Back Loans?
(1) 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.
(2) 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.
Can Bounce Backs be Written Off?
Bounce Back Loans were to the company, not the individual. Since they were guaranteed by the government, not personally, they can be written off if the company becomes insolvent, without repurcussion, assuming they were used sensibly.
Get in Touch
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.
All of our insolvency content is written licensed insolvency practitioners. The primary sources are listed below. Learn more about the standards we follow in our editorial guidelines here.
- Insolvency Practitioners are suggested to report potential cases of Bounce Back Frud here: https://www.tax.service.gov.uk/shortforms/form/TEH_IRF?_ga=2.131819727.192362486.1597067537-679006552.1591708728
- Insolvency Service takes action against businesses abusing COVID-19 financial support – https://www.gov.uk/government/news/insolvency-service-takes-action-against-businesses-abusing-covid-19-financial-support