Can I use a Bounce Back Loan to pay dividends? No, you cannot use a Bounce Back Loan to pay dividends.
Can you pay dividends in your company again? Yes, you can but not using the Bounce Back Loan.
You cannot use Bounce Back Loan support to pay Dividends for two reasons:
Paying Dividends has exactly the opposite effect that was intended by the provision of a Bounce Back Loan support. It withdraws needed cash from a business and gives it to the owners.
A Bounce Back Loan had to be used for the economic benefit of the business. This was explained in the article What Is Economic Benefit For Bounce Back Loan Use?
There are two key possible consequences of paying dividends with a Bounce Back Loan:
Businesses that applied for a Bounce Back Loan were affected by the Pandemic. The National Lockdowns and their effect on normal trade was likely to have caused many businesses to become insolvent. However, a company Director should not declare Dividends when a company is insolvent as there is a duty to have regard to the interests of the creditors.
If a company used Bounce Back Loan monies to pay Dividends which subsequently deprives the company of necessary cash flow, it could end up in Liquidation. If a company goes into Liquidation then it is common for Bounce Back Loan Investigations to result which may lead to Director Disqualification Proceedings.
Additionally, if the lender is concerned a Bounce Back Loan has been used incorrectly then it has an obligation to report this to the National Crime Agency. In the event of an investigation following such reporting the consequences could be serious for the Director and the company, possibly even resulting in a prosecution.
If a Dividend is declared and paid when a company is insolvent then it might amount to an Unlawful Dividend because the company may not have had sufficient distributable profits to pay the Dividend.
In the case of many owner managed businesses where the Directors and Shareholders are the same people, Dividends paid unlawfully may need to be repaid. This is particularly the case for an insolvent company that goes into Liquidation. In a Liquidation, the Liquidator will be required to consider the use of Bounce Back Loan monies to see if they were used for the economic benefit of the business.
It is possible that an unlawful dividend could in fact give rise to an Overdrawn Director’s Loan Account. If this is not repaid within 9 months of the company year end then corporation tax under Section 455 of the Corporation Tax Act 2010 is levied on the company.
Withdrawing cash from a business by way of Dividends may amount to a breach of Director duty. Directors are expected to be aware of their Director duties.
A Director has a duty to act in the best interests of the company and to have proper regard for the interests of creditors when it is insolvent. This is known as the Creditor Duty.
A Director who has caused or permitted the payment of an unlawful dividend can be liable to compensate the company for the loss arising. It is in effect a form of negligence.
If you are struggling and can’t pay a Bounce Back Loan then get in touch with us.
There is a process known as Creditors Voluntary Liquidation which can enable a Director to wind up a company in an orderly manner that is fully legal and is appropriate for many insolvent companies struggling to pay back Bounce Back Loans. It is an insolvency procedure specifically provided for in the Insolvency Act 1986.
An Insolvency Practitioner, such as Oliver Elliot’s CEO, Elliot Green, can in the appropriate case assist a Director to wind up a company by placing it into Liquidation, thereafter being appointed the Liquidator to take over the burden of the company from its Directors.
It would be extremely unwise (to say the least) to pay any dividends if you have just received the loan but it does not mean there can be absolutely no defending a dividend paid from a Bounce Back Loan. A better approach however would be to take independent professional advice to ensure that what you are doing has regard for all the relevant facts and takes account of your obligations.
Although you should NOT use a Bounce Back Loan to pay dividends this does not mean you cannot pay dividends ever again.
In principle, if a company has distributable reserves then provided ALL the rules set out in the legislation and Director duties are being fully followed, a company can pay usually a dividend.
For a free no obligation chat about any of the matters detailed above, please do get in touch for help. An expert will call you back or if you prefer exchange emails.
We can explore your situation and consider the best way to help you and your business needs. You can call us 020 3925 3613 or fill in the form below and will get back to you quickly. We Know Insolvency Inside Out.
If you have any questions in relation to Can I Use A Bounce Back Loan To Pay Dividends? then contact us as soon as possible for advice. Oliver Elliot offers a fresh approach to insolvency and the liquidation of a company by offering specialist advice and services across a wide range of insolvency procedures.
This page is not legal advice and is not to be relied upon as such. This article Can I Use A Bounce Back Loan To Pay Dividends? is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.
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