For many company directors, the decision to apply for a Bounce Back Loan required relatively little thought.
Available on attractive terms, the loans were designed to get quick funding to small businesses that are struggling due to the coronavirus pandemic. However, many company directors didn’t take the time to read the terms of the loan carefully.
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What is a Bounce Back Loan?
The Bounce Back Loan Scheme (BBLS) was introduced as a way to get money to the small businesses that were struggling to access emergency funding through the Coronavirus Business Interruption Loan Scheme (CBILS). Millions of Bounce Back Loans were approved, giving small businesses access to 25% of their annual turnover up to a maximum limit of £50,000.
There were no fees or interest to pay for the first year. After that point, the annual rate of interest is fixed at 2.5%. The term of the loan is usually six years, but early repayment is allowed without any additional fees. The government also guaranteed 100% of the loan, so personal guarantees were not required. That reduced the risk for company directors.
Who is Liable for a Bounce Back Loan in a Limited Company?
The limited company structure is set up to include a clear seperation between directors and the company itself. This is the major advantage of having a company because it means that liability is ‘limited’ to the company itself.
Also, Bounce Back Loans were so available precisely because they did not request personal guarantees from business owners. Instead, the government guaranteed 100% of the loan. So, if the company fails and enters into voluntary or compulsory liquidation, the lender will get their money back from the government. That protects the director’s personal finances and assets. If the company is insolvent, the debts are written off with the company, with a few exceptions details below.
When Could Company Directors be Personally Liable for the Bounce Back Loan?
Providing that directors acted reasonably and responsibly and used the Bounce Back Loan for the economic benefit of the business, there is no risk that you will be personally liable for the loan if the company cannot pay it back. However, there are two instances when you could face personal liability for the debt, even when you haven’t provided a personal guarantee.
- Instances of misfeasance – Where a directorr deliberately used the funds for your personal gain, such as repaying a director’s loan account or paying dividends or drawings when the company cannot pay its creditors or suppliers.
- If preferential payments were been made – The loan is used to repay certain creditors ahead of others, for example, you pay off a loan to a connected party or where a personal guarantee has been provided, then you could be made personally liable to pay it back.
How can you be Made Personally Liable to Repay a Bounce Back Loan?
Although the government has temporarily suspended wrongful trading regulations to help struggling businesses, the rules surrounding preferential payments (s239 Insolvency Act 1986) and misfeasance (s212) still apply.
If the company cannot pay its debts and enters into voluntary or compulsory liquidation, the liquidator will investigate the actions of the directors in the period leading up to and during the insolvency. If they find payments that were made in preference or acts of misfeasance, the liquidator or the court can make the company director(s) personally liable to repay the loan or make payments to the company for the benefit of its creditors.
Receive Expert Advice on Personal Liability?
If you’re concerned about potential personal liability issues arising from a Bounce Back Loan, call 08000 24 24 51 or email firstname.lastname@example.org today. We have a team of licensed insolvency practitioners who will provide a free initial consultation to help you better understand your position.