For the majority of directors who have taken out a bounce back loan in which the company has later gone into liquidation there will be no material adverse consequences. The reason for this is obtaining a bounce back loan and being unable to pay it back is not misconduct.
Another reason why many directors will not suffer material adverse consequences is a matter of government resources. The Insolvency Service (which is the government agency responsible for investigating and if necessary prosecuting bounce back loan misconduct) cannot investigate and prosecute all cases. Certain cases of a certain type will inevitably be more likely to be selected for further investigation and potential prosecution. Those cases will usually be the ones where the conduct is deemed to be more serious.
For example, a common feature of such cases is the maximum bounce back loan of £50,000 was applied for when it should not have been. This contrasts with a bounce back loan of £2,000 being the minimum and other amounts materially below the maximum.
Although the criteria used to select cases for investigation and prosecution is not necessarily known it is a recurring theme that there were many instances in which companies had little to no turnover, either for the entirety of the calendar year 2019 or when considering the estimated turnover position and yet some directors nevertheless still applied for a £50,000 bounce bank loan. It is no surprise that such cases feature prominently in the director disqualification listings.
What Are The Key Consequences A Director With A Bounce Back Loan Could Face?
The consequences a director of a company that had a bounce back loan that subsequently went into liquidation could face as follows:
The misconduct (if any) arises when a back back loan should not have been obtained and or it has been misused. The bounce back loan should not have been obtained unless the amount applied for was no more than 25% of the company’s turnover for the calendar year 2019. Estimated turnover for 2019 was permitted if a company had not commenced trading as at 1 January 2019. Furthermore, if a bounce back loan was used for purposes other than the economic benefit of the company then It will be deemed to have been improperly deployed.
Those are the two key matters alongside the additional question of whether or not a company applied for more than one bounce bank loan. The maximum permitted number of bounce back loans a single limited company could obtain was one.
Liquidator’s Investigations Of Bounce Back Loans
It therefore follows that the consequences for a director going into liquidation with a bounce back are that the application and its subsequent deployment will inevitably feature in a liquidator’s investigations.
There is no getting away from this. Once a company has gone into liquidation where a bounce back loan goes unpaid even though the application for it would now have been some years ago, all cases of unpaid bounce back loans mean certain investigations will be undertaken.
Upon a company going into liquidation the liquidator has to issue a report to the Insolvency Service within 3 months of their appointment. That report takes the form of a focused questionnaire. Many of the questions are binary. In other words, the options for the liquidator when answering such questions can involve answers confined to yes or no. The format of the questionnaire is intended to be factual.
Although a liquidator may add further information and indeed is required to do so when new information is forthcoming it may be the case for the most part that the answers provided will be confined to a yes or no position. In the case of the questions surrounding bounce back loans the questions put to a liquidator include details on the use of the bounce back loan, the application for it and whether or not the company concerned applied for more than one bounce back loan.
What Can A Director Do About The Potential Consequences?
The answer is as this matter is being considered in 2024 and later, not a lot if the rules have clearly been broken. There are occasions when circumstances are far from clear cut and a director should consider taking professional advice accordingly.
However, in a clear cut case of misconduct the reason it can be difficult is the bounce back loan application will have been prior to the 31 March 2021 and therefore the application for it will be historic and cannot be undone. In so far as what can be done in relation to the use of the bounce back loan for the vast majority of cases again the amount it will be historic as the bounce back loan will have been harvested by the company and deployed in its trading activities. There will be few cases in 2024 and afterwards in which the bounce back loan has not been utilised and is still available to be drawn down by a company. The same position applies to a company that applied for more than one bounce back loan when it should not have done.
Role Of A Liquidator When There Is Bounce Back Loan Misconduct
It is not the job of the liquidator to sweep away the consequences of a bounce back loan which may be adverse to a director. Liquidators are regulated individuals and have to act with the highest of integrity at all times. There is therefore no discretion available to a liquidator to act in the best interest of the director personally rather than in the best interest of the company and its creditors when reporting on and attending to the matter of improper misconduct concerning bounce back loans.
Where a liquidator does have some discretion concerns not the reporting of the balance back loan but if a bounce back loan has given rise to claims against a director because of a breach of directors duties then the liquidator has to decide if it’s in the company’s interests to bring civil recovery proceedings against a relevant director.
In many instances, upon a company going into creditors voluntary liquidation there will be few (if any) funds available to finance any legal proceedings to swell the assets of the company resulting from such misdemeanours. This is a fact of life that is a feature more generally of the insolvency regime and applies to all potential rights of action not merely those applicable to bounce back loan misconduct.
