No Personal Liability For A Bounce Back Loan
What Is A Bounce Back Loan?
In order to deal with the economic devastation arising from Covid-19, the Chancellor of the Exchequer, Rishi Sunak, came up with a government backed business loan scheme known as the Bounce Back Loan. He said the purpose was to enable businesses a “breathing space to get back on their feet“.
It was a scheme first launched in May 2020 to deal with businesses:
- losing revenue, and seeing their cashflow disrupted, as a result of the COVID-19 outbreak
- or which can benefit from £50,000 or less in finance.
SUMMARY OF PERSONAL LIABILITY FOR BOUNCE BACK LOAN
- You CANNOT be personally liable for a Bounce Back Loan directly.
- BUT you could have a problem if you wrongly applied and obtained a Bounce Back Loan when ineligible.
- OR if you incorrectly used the Bounce Back Loan you might have a problem later if this was investigated.
- If you have used the Bounce Back Loan to PREFER certain creditors or to engage in WRONGFUL TRADING this could be an issue.
- However, if you cannot repay the Bounce Back Loan then you may be able to restructure the payments under the PAY AS YOU GROW scheme.
The key feature of the Bounce Back Loan Scheme was that a lender provided up to a 6 year loan from £2,000 up to 25% of business turnover. The maximum loan amount was £50,000.
The scheme gave the lender a full government guarantee against the outstanding balance on the loan but the business always remains liable to repay the loan.
Potentially millions of businesses are currently struggling to pay back the Bounce Back Loan repayments that are now falling due. The company that has taken out the Bounce Back Loan is liable to make the repayments even if the company owners are not. However, many businesses in the hospitality sector for example have not seen a sufficient recovery in their takings and are struggling to repay their Bounce Back Loans.
If your Limited company is unable to pay the Bounce Back Loan repayments then there is assistance available to help. Importantly you should not be personally liable as a Director of Limited company for making the payments on a Bounce Back Loan.
The Bounce Back Loan Scheme was operated by the British Business Bank (“the BBB”) which is government owned. The BBB confirmed that a Bounce Back Loan was not a personal loan:
A loan under the Scheme is a business loan. The terms of the loan are covered by the Scheme.
The BBB also said that for a Bounce Back Loan that “no personal guarantees” could be required:
No recovery action can be taken over a borrower’s main home or primary personal vehicle.
However, if you did not operate or trade through a Limited Liability Company then there is increased risk as BBB said:
For sole traders or partnerships, who do not have the benefit of limited liability, other personal assets may be at risk of recovery action.
There are two clear ways that you could end up with some personal liability for a Bounce Back Loan as follows:
- Wrongly applying and obtaining a Bounce Back Loan when ineligible; and
- Incorrectly using the Bounce Back Loan.
Wrongly Obtaining A Bounce Back Loan: Risk Of Personal Liability For Bounce Back Loan
It is important to remember that a Bounce Back Loan taken out by a Limited Company will simply not be the liability of its Directors. Therefore as a Director, you usually cannot be personally liable for a Bounce Back Loan. However, for that to hold good you must have correctly applied for the Bounce Back Loan in the first place. What does that mean?
Well, in order to qualify for a Bounce Back Loan you will have had to formally declare to the lender:
- that you were running an active UK trading company; and
- at least 50% of the company’s income is from trading; and
- the loan is for the economic benefit of the business and not taken out for personal reasons.
So if you have breached any of those three key provisions, wrongly obtaining a Bounce Back Loan and in particular, in doing so, misled the lender into providing the loan to you, then you will be at some risk of being held personally liable for the Bounce Back Loan. Clearly if you deliberately as opposed to through some misunderstanding or mistake, applied for a Bounce Back Loan when you should not have done so then this could be considered fraud. In such instances, personal liability could even more easily flow for a Limited Company Director as a result. This could also be considered a breach of duty and misfeasance by a Director and such a person might have to pay compensation to the company accordingly.
Incorrectly Using The Bounce Back Loan: Risk Of Personal Liability For Bounce Back Loan
If you have obtained a Bounce Back Loan correctly but you have used the funds for purposes unrelated to the economic benefit of the business then you could have some personal liability for a Bounce Back Loan. The reason is that the Bounce Back Loan has been provided on the basis that it will only be used to further the economic interests of the company that took out the loan ie. typically for working capital.
That does not mean it could not necessarily be used to discharge your wages as a Director but it does mean that if you took advantage of a Bounce Back Loan inappropriately and upon receipt declared an abnormally high dividend or a bonus for yourself, that you are likely to be at risk of breaching the terms of the loan.
If you are a Director who has other Limited companies under your control then you could be at risk if you have used the Bounce Back Loan to fund another of your companies. The Bounce Back Loan would have been lent to the company that applied for it and therefore must have been used for that company’s economic benefit. Whilst there could be an argument if there was a normal arms-length trading relationship between two companies that you owned, nevertheless, if part of the Bounce Back Loan was used to lend money to one of your other companies then that is unlikely to satisfy the requirement of ‘economic’ benefit of the company that received the loan in the first place. This is the sort of issue that is likely to feature in Director Disqualification Proceedings in the future.
If you have been unable to rescue your business with the Bounce Back Loan because the business deteriorated further after the loan was provided and you entered insolvent Liquidation or Administration then how you used the funds could put you at some risk of personal liability. This is particularly so if you have entered into any transactions that mean some creditors (perhaps yourself or paying off debts for which you have given a personal guarantee) have been paid using the Bounce Back Loan and not others, such as HMRC. These transactions could be considered a Preference and a Liquidator for example only, could ask you to repay those monies you received ahead of other creditors.
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.
With huge numbers of businesses due to start the repayments on their Bounce Back Loans as early as May 2021 but likely to be unable to do so because they are insolvent, it is anticipated that the concerns about Directors being personally liable could conceivably rocket. Fortunately, the government appears to have recognised that there could be thousands of businesses that might be unable to make the repayments when the payments fall due and if they continued to trade they could be at risk going forwards of Wrongful Trading.
Thankfully, there is a new scheme being introduced called Pay As You Grow that specifically relates to Bounce Back Loan repayments.
If you anticipate that you will run into difficulty in making the repayments on your Bounce Back Loan, you can seek to take advantage of Pay As You Grow which provides for the following for businesses to:
- request an extension of their loan term to 10 years from six years, at the same fixed interest rate of 2.5%
- reduce their monthly repayments for six months by paying interest only (this option is available up to three times during the term of their Bounce Back Loan)
- take a repayment holiday for up to six months (this option is available once during the term of their Bounce Back Loan).
The effect of the reorganisation of these Bounce Back Loan repayment plans under Pay As You Grow means that the risk of Wrongful Trading for these businesses should substantially diminish with the repayment terms will be substantially more favourable.
This is potentially good news for many Directors who may have been concerned about the increased risk of Wrongful Trading in the months and years ahead. This should mean that whilst Wrongful Trading does carry the risk of personal liability, it nevertheless should be for many people now very much reduced.
How To Avoid Being Personally Liable For A 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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Disclaimer: Personal Liability For A Bounce Back Loan
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