Bounce back loans were introduced as a support for UK businesses during the Coronavirus pandemic. For many Directors they were a last resort, the last chance to save their businesses and a chance to survive the pandemic.
Many Directors are now starting to ask the question: “If my business fails and we can’t pay the bounce back loans, will I become personally liable?”
Read on to learn more about bounce back loans and where personal liability for Directors may arise.
1) What are bounce back loans?
The UK Government website defines bounce back loans as:
“The Bounce Back Loan Scheme (BBLS) enables smaller businesses to access finance more quickly during the coronavirus outbreak.”
Bounce back loans were introduced by the UK Government to help businesses during the Coronavirus pandemic
Supporting facts and information
Here are some supporting facts and information about the bounce bank loans scheme:
- Applications for new loans and top-up loans could be made up until 31st March 2021
- 29 lenders took part in the loan scheme
- Businesses could borrow between £2,000 and up to a maximum of 25% of their turnover, up to a maximum loan of £50,000
- The UK government guaranteed 100% of the loan value
- There was no interest payable in the first 12 months, after this period the interest payable is 2.5% per year
Valid uses for bounce back loans
Many businesses took the view that bounce back loans were a low cost form of finance and therefore a great idea. When signing up with one of the lenders though terms and declarations will have been signed, which can cause later problems if the bounce back loan isn’t used in the ways intended.
It's impractical to list every suitable use here but some suitable uses include boosting cashflow, paying employee wages, buying stock, paying overheads, etc. In short, the loans must be used in a way that demonstrates economic benefit for the business.
Loans can be used to pay (but not increase) for Director salaries and dividends – but the business must be able to prove there is adequate profit to pay such dividends.
Declaration that the business is viable and not an undertaking in difficulty
When applying for the bounce back loan, Directors needed to confirm that they were not an “undertaking in difficulty”. This is defined in the Insolvency Act 1986 and covers many areas including a company which can’t pay its debts, a company with lower assets than liabilities and a business which is seen as unviable as an ongoing concern.
Directors requesting bounce back loan support would need to declare that their business is not an “undertaking in difficulty”, that the business is viable and also that the money is not being taken with prior knowledge that the business is likely to become insolvent or close.
Can Company Directors be personally liable for bounce back loan debts?
The answer to this is “Yes”, in some situations, Company Directors can be personally liable, we discuss areas of liability below:
2) Payments were made to “creditors in preference”
All businesses that are at the risk of becoming insolvent must act in the interests of all creditors best interests and can’t seen to be favouring some creditors over others. If the bounce back loan was used in the following ways “a preference” may have arisen and the Director may become personally liable:
- Debts are paid which had a personal Director guarantee, whilst unsecured creditors were not paid
- Family member (and other relationship) debts were paid in preference to other creditors
- Outstanding tax liabilities were ignored whilst other creditors were paid
In some circumstances Directors may be personally liable for bounce back loan debts.
3) Funds were not used in accordance with the terms of the loan agreement
Directors will have signed Terms and Conditions when signing up for the bounce back loan. Use of the funds must be in accordance with these terms. If funds are not used for allowable purposes, then the Director could be personally liable for the debt, these include:
- Payment of personal debts
- Property investments
- Repayment of Director Loans
To clarify, Directors should review the Terms and Conditions they signed up to when signing up for the loan. These can vary from one lender to another.
Calling Greenfield Recovery for support and advice
Are you in a situation where you feel you may be personally liable for bounce back loans repayments, and you need confidential legal advice then do not hesitate to contact Greenfield Recovery today? Call us on 0121 201 1720 or fill out our contact form here or further below.
We can advise on your best options moving forward, click here to book an appointment.