Personally Liable For Bounce Back Loan? The state of the fragile UK economy is such that it is likely that many companies will default on repayment of such loans.
What Is The Bounce Back Loan Scheme?
The Bounce Back Loan Scheme (BBLS) enables smaller businesses to access finance more quickly during the coronavirus outbreak.
The scheme helps small and medium-sized businesses to borrow between £2,000 and up to 25% of their turnover. The maximum loan available is £50,000.
The government guarantees 100% of the loan and there are no fees or interest to pay for the first 12 months. After 12 months the interest rate will be 2.5% a year.
The scheme is open to applications until 31 March 2021.
If you already have a Bounce Back Loan but borrowed less than you were entitled to, you can top up your existing loan to your maximum amount. You must request the top-up by 31 January 2021.
Eligibility For A Bounce Back Loan
You can apply for a loan if your business:
- is based in the UK
- has an annual turnover of up to £45 million
You need to show that your business:
- would be viable were it not for the pandemic
- has been adversely impacted by the coronavirus
If you want to borrow £30,000 or more, you also need to confirm that your business was not classed as a business in difficulty on 31 December 2019.
Who Cannot Apply For A Bounce Back Loan?
Businesses from any sector can apply, except:
- banks, insurers and reinsurers (but not insurance brokers)
- public-sector bodies
- state-funded primary and secondary schools
How Long Is A Bounce Back Loan For?
The maximum length of the facility depends on the type of finance you apply for and will be:
- up to 3 years for overdrafts and invoice finance facilities
- up to 6 years, for loans and asset finance facilities
Not Personally Liable For Bounce Back Loan?
Could you as a company director be personally liable for bounce back loan? There is no personal liability on a company director who successfully applies for a Bounce Back Loan. The liability is with the limited company. The scheme is fully backed by the UK government.
There is also no requirement for a company director to provide a personal guarantee. This is different to the Coronavirus Business Interruption Loan Scheme (CBILS), which was only partially government-backed with some lenders demanding personal guarantees. A Bounce Back Loan requires no such guarantees from directors.
What Happens If My Company Goes Into Liquidation?
If your company goes into liquidation then the loan is an unsecured claim as a creditor. This means that such a loan would be unlikely to be repaid in full leading to it being written off.
If your Bounce Back Loan cannot be repaid because of the continuing effect of the damage to the UK economy from Covid-19 and its impact on your company, then in all likelihood it will have to be closed down.
In order to close down the company one way to do that, is to go into Creditors Voluntary Liquidation. This is the procedure of going into liquidation, typically at the initiation of the company and not its creditors. A licensed insolvency practitioner must be appointed to be the liquidator who acts instead of the Directors under the provisions of the Insolvency Act 1986. He or she will value and then look to realise the company’s assets, repay the creditors as set out in the statutory order of payment in insolvency proceedings, to enable the company to be the subject of an orderly winding up process.
Alternatively, the company could go into Compulsory Liquidation and a similar process undertaken but under the compulsion of having first been the subject of a Court order.
If your company does go into liquidation, banks are ordinarily secured creditors save if they are reliant upon personal guarantees. Ordinarily, a bank will not be without any security of any kind and often their debts are secured against company assets. Subject to the rules on distribution, they are often typically among the first creditors to be repaid from realisations of the company’s assets.
However, this is not the position where a Bounce Back Loan is concerned because there is no security provided. The loan is underwritten by the UK government who the bank can look to for repayment of the loan, not the company if there is a shortfall on liquidation.
Director’s Duties And Responsibilities
These are exceptional times due to Covid-19. In times of normal trading a company would be ordinarily unable to easily obtain loans from banks such as those offered by the Bounce Back Loan Scheme without providing some security over the company’s assets or a personal guarantee.
In view of that, it is expected that Directors will behave responsibly when taking out such loans. If information supplied to obtain the loan was found to have been misleading, then a director who provided the same could be at risk of having obtained credit improperly. Such improper conduct could amount to a breach of duty by a director, otherwise known as misfeasance. A director found guilty of misfeasance can be called upon to personally compensate the company for the loss they have caused it to suffer.
If the company was not viable as it is required to have been in December 2019, then conceivably the directors of such a company that took out a Bounce Bank Loan may be at some risk of being investigated by a Liquidator for Wrongful Trading if the company later went into Liquidation.
Tbe risk of Wrongful Trading is however currently reduced because of legislation (The Corporate Insolvency and Governance Act 2020 (Coronavirus) (Suspension of Liability for Wrongful Trading and Extension of the Relevant Period) Regulations 2020) introduced to suspend the Wrongful Trading provisions until 30 April 2021. However, this suspends certain periods of Wrongful Trading; it does not suspend all periods of time that the company might have been wrongfully trading. This has been explained in an earlier post called Wrongful Trading suspended again.
Personal Liability Arising From Preference Transactions
Perhaps one of the biggest issues that can arise is likely to be what the loan monies have been used for. If the loans have been used for example to repay director loan accounts instead of to ‘bounce back‘ and rescue the company from the economic effects of Covid-19, then if the company winds up going into liquidation, there is a real risk that a Preference would have resulted.
What Is A Preference?
A preference is a transaction entered into that puts a creditor into a better position than they ought to be in and that the party enabling this to happen was influenced by a desire to do that. This is set out in section 239 of the Insolvency Act 1986 and is also known as an antecedent transaction.
If a company gives a preference and the recipient of it is the Director personally, (eg repayment of a Director’s loan account), then the Director could well be made personally liable to the company for the preference monies if a Liquidator were to apply to the court to recover the same.
How To Avoid Being Personally Liable For Bounce Back Loan
The Bounce Back Loan is in effect no different to any other type of credit that is provided to a company. The key distinction is that it is provided without the requirement for security. These lenders traditionally would be unlikely to lend without security in normal trading times.
However, it does not appear that there is anything in the terms of such loans that means a director has the additional risk of personal liability in comparison with other forms of credit they might have caused the company to accept.
The arguable difference might be that the need for a Bounce Back Loan means that whilst such a company applying for one might well have been viable in normal trading times, in view of Covid-19 that might not now be said to be the case. So there is likely to have been a cash flow difficulty of some kind arising, otherwise, the Bounce Back Loan might never have been required in the first place.
The position means that to ensure a Director could not be found guilty of a breach of duty, they are likely to need to be able to demonstrate and account for the deployment of the Bounce Bank Loan on legitimate and proper trading activities. Provided that is the case then a Director may well be less susceptible to the risk of a liquidator, who is investigating the company’s financial affairs and dealings, of conduct that seeks to challenge the transactions entered into.
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If you have any concerns about a Bounce Back Loan you have obtained or you are still facing difficulties after having used one, Contact Us without delay. The sooner you get in touch the more options might be available to you. In any event, you can discuss these matters and your concerns at a Free Initial Consultation with us.
Disclaimer: This post ‘Could A Director Be Personally Liable For Bounce Back Loan?’ is not legal advice and not to be relied upon as such. It is provided for information purposes only. No liability is accepted for any reliance upon it. You should seek independent professional advice on the discrete facts of your case.