Problems With Personal Use Of Bounce Back Loan
The Covid-19 Business Recovery Help options from the government included over £46 billion in Bounce Back Loans but personal use of Bounce Back Loan is not permitted.
Bounce Back Loans were issued to enable people to recover from the Pandemic not to fund people’s lifestyles.
Repaying A Directors Loan Account
You cannot use Bounce Back monies to repay your Directors Loan Account except if you were doing this instead of paying an ordinary monthly salary. However, because it could be easily misunderstood it is best to take advice.
Why Can A Bounce Back Loan Not Be Used For Personal Purposes?
The Bounce Back monies were provided as emergency funding to attempt to save businesses that were in financial trouble due to the Pandemic. These loans were in essence a breathing space to safeguard viable businesses that suffered sudden cashflow problems.
The Bounce Back monies were therefore to ease a cashflow crisis for the economic prosperity of the business that they funded, not to safeguard the Directors personally.
Can I Use Bounce Back Loan To Pay My Wages?
Yes, you can. Whilst Bounce Back monies could not be used for purely personal purposes, it was permissible to use such funds to pay the salaries of the Directors of the companies in the ordinary course of business.
Consequences Of Using A Bounce Back Loan For Personal Use
If the relevant company goes into Liquidation and the Director’s loan account is not in credit the Director could be liable:
1. to the Company under Section 212 of the Insolvency Act 1986 for misfeasance or breach of duty, and
2. to the Liquidator under Section 238 of the Insolvency Act 1986 – transaction at undervalue.
In respect of a liability for a breach of duty, there would be a possible defence as to whether or not a loss arose.
However, if the director’s loan account is in credit, the Director could still find themselves with a problem. Personal use of Bounce Back monies could then potentially amount to a Preference under Section 239 of the Insolvency Act 1986. That is a claim that would vest in the Liquidator.
Key Point About Use Of Bounce Back Loan Monies
An insolvent company does not have the luxury to deploy its assets for the benefit of a Director in the same way that a solvent company potentially could with shareholder approval. Therefore it is sensible to take professional advice at the earliest opportunity.
