For many company directors, the decision to apply for a Bounce Back Loan requires relatively little thought.
Available on attractive terms, the loans are designed to get quick funding to small businesses that are struggling due to the coronavirus pandemic. However, company directors must take the time to read the terms of the loan carefully. Fail to do so and personal liability issues could arise.
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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). At the last count, more than 1.26 million Bounce Back Loans had been approved, giving small businesses access to 25% of their annual turnover up to a maximum limit of £50,000.
There are 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 guarantees 100% of the loan, so personal guarantees are not required. That reduces the risk for company directors.
What Declarations Must be Made When Applying for a Bounce Back Loan?
When applying for the Bounce Back Loan Scheme, company directors must formally declare that their business was financially sound before 31 December 2019 and that Covid-19 is responsible for the financial problems they are experiencing. If the declarations made by the company directors are found to be false and the company goes on to fail, the company directors could be personally liable for repayment of the loan.
What can Bounce Back Loans be Used For?
The loans have to be used for the economic benefit of the company, but within that broad remit, there are very few restrictions. That means the funds could be used to pay staff wages, including the salaries of directors (but not increase them), help with rent and business rates and pay monthly overheads. The loans can even be used to refinance existing business debt, although caution should be shown when taking this approach for reasons that we’ll explain later on.
Bounce Back Loans cannot be used for anything that will benefit the company directors personally. That includes repaying personal debts, buying personal assets or paying dividends without adequate profits showing on the balance sheet. If the loan is found to have been used to further the financial position of the company directors, that could lead to personal liability issues later on.
What Happens if you Default on a Bounce Back Loan?
It’s not the case that the Bounce Back Loan Scheme will be enough to save every business. In fact, the banks are predicting that up to 40% of Bounce Back Loans may never be repaid. If you take out a Bounce Back Loan that the company cannot repay, then as long as the loan was used for the economic benefit of the company, you don’t have to worry. You were not to know how long the outbreak would last or the impact it would continue to have on your company.
The lenders of Bounce Back Loans are not able to request personal guarantees from business owners. Instead, the government guarantees 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.
When Could Company Directors be Personally Liable for Bounce Back Loans?
Providing that you act reasonably and responsibly and use 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 you deliberately use 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 have 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.
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If you’re concerned about potential personal liability issues arising from a Bounce Back Loan, call 08000 24 24 51 or email email@example.com today. We have a team of licensed insolvency practitioners who will provide a free initial consultation to help you better understand your position.