Bounce back loans were loans of up to £50,000 and were intended for smaller businesses. They were backed by the government and were relatively fast and easy to apply for. This allowed access to capital for a vast amount of small and medium-sized enterprises (SMEs). Lenders did not require personal guarantees from directors. However, many directors are unaware that just because personal guarantees were not sought, there are still certain conditions that must be met to ensure directors are not responsible to repay the loan personally. These conditions include upholding your director’s duties and adhering to the rules about how bounce-back loans can be used.
What could the loans be used for?
The whole idea of the loan was to provide capital quickly for companies adversely affected by the Covid19 pandemic. Examples of intended use for the loans were to pay staff, invest in equipment, stock, and refinancing other high-interest loans that might have been a significant burden on the business. The loan could be used to pay, but not increase, director salaries and pay dividends, but only if the balance sheet shows adequate profit to do so.
If the business was not viable or was showing signs of insolvency prior to the pandemic, the loans should not have been applied for. When directors did apply, they had to declare that the business was not “an undertaking in difficulty”.
When could a director become personally liable for the loan?
If you take the bounce back loan out of the company account and spend it on yourself for a car, holiday or even general living expenses, this could be regarded as a director acting irresponsibly. More concerningly, if you have used the loan to repay personal debts, that could be deemed as fraudulent. If the company then cannot pay back the loan, the bank, or a liquidator, are likely to investigate where the funds went and would likely conclude that the loan was “stolen” from the company. You as a director would be personally liable for the debt. In addition, you are at risk of being disqualified from being a director of a company.
It would seem sensible to pay off company debts when you have funds to do so, however you must also be extremely careful if you do this if it is to the detriment of other creditors. For example, if you use a bounce-back loan to pay off your uncle who lent money to the company a few years ago, rather than paying HMRC or the bank loan, then you are in effect creating a preference. You are preferring one creditor to another. If the company were then to enter insolvent liquidation, a liquidator could seek to reverse this transaction at a later date. Although in this scenario you may not be personally liable, it will clearly impact you when a liquidator demands money from family members etc.
It has been estimated that 40% of companies will not be able to pay bounce back loans back. As the UK government will be keen to get money back from the Bounce Back Loans Scheme, the behaviour of directors will be closely looked at.
When can a bounce back loan be written off?
The bounce-back loan was a loan to the company, not to you as an individual, even if you are the director and sole shareholder. Therefore, if the company goes into liquidation or administration, the loan will be written off and the company will cease to exist. Only if there was any wrongdoing/ misapplication of the loan on your part as referred to above, will you be responsible to repay sums to the company.
Early advice is key. For a free initial chat, please contact our Insolvency Team on 01482 326511.