Economic benefit for Bounce Back Loan use was a condition of obtaining such a loan.
When a business fails and goes into Liquidation the investigations that inevitably result typically consider the application for the Bounce Back Loan and how it was used. If either the application or use is considered improper then there can be consequences for a Director.
Economic benefit of the loan’s use was one of a series of key conditions when the UK government provided Bounce Back Loan support to businesses struggling due to the Covid Pandemic. It is therefore a key question put to a Director if they are the subject of a Bounce Back Loan Investigation and if the Insolvency Service looks to consider Director Disqualification Proceedings for unfit conduct.
The key considerations related to the application process and if successful the use of the Bounce Back Loan. There were two key considerations in respect of the application process. Firstly, that you could only borrow up to a maximum sum of £50,000 or 25% of your turnover whichever was the lower amount. Secondly, you could only apply for one Bounce Back Loan per business.
The ‘economic benefit’ use of a Bounce Back Loan is a term that is not defined.
It appears that there are two key ways to consider the meaning of economic benefit for Bounce Back Loan’s use. One is to look at legislation in respect of Director duties and the other is the criticism of conduct not considered to be appropriate use when someone has been disqualified as a Director.
Economic benefit of the use of a Bounce Back Loan will be payments made from a company for its legitimate expenditure so that it can trade. Typically such expenditure will be purchases that flow through its profit and loss account but it conceivably could also amount to purchases of assets needed to trade also.
A potential grey area appears to be the use of Bounce Back Loan monies to pay Directors.
The services of the Directors of a company are crucial and therefore so is the associated cost. This is strictly subject to what the Articles of Association stipulate. However, without paying Directors many businesses would fold simply because in many small companies, the Directors are also the owners of the business. As a result, for most small companies the Directors will need to be paid so THEY can put food on their own table.
The area of possible difficulty is what form can a Director be paid and how much is deemed acceptable from Bounce Back Loan monies.
Given the need for Bounce Back Loans was often due to cash flow problems for companies affected by the national lockdowns, material changes (upwards) to Director salaries may not qualify as for the company’s economic benefit.
However, not all Directors take their drawings from a company in the form of salary. Some Directors will take their pay or part of it (commonly for tax efficiency reasons) as a Dividend as they are also a Shareholder. Other Directors (who are also Shareholders) may take their drawings as an Overdrawn Director’s Loan Account which is then written off and they are subject to income tax on this on their personal tax returns.
The problem is that both a payment of a Dividend or an Overdrawn Director’s Loan Account written off is not an expense of a company. Neither appears on the profit and loss account as part of a company’s trading activities. As a result, it may be a struggle for a Director to convince the Insolvency Service that deployment of Bounce Back Loan monies by paying Directors via Dividends or their Overdrawn Director’s Loan Account qualifies as being for the economic benefit of a company. Perhaps more likely it would be considered to be for the economic benefit of the Director personally, not the company.
The economic benefit purpose of spending company money seems to match the duty to promote the success of the company as set out in Section 172 of the Companies Act 2006. This refers to the need for a Director to act in good faith in promoting the success of a company.
Section 172 says that a Director ought to have regard for the following:
A review of Director disqualifications is a potentially useful way to consider what the Insolvency Service considers is not an appropriate economic benefit for Bounce Back Loan use.
The Insolvency Service publishes a Director Disqualification Register for Directors recently disqualified due to unfit conduct that has involved either Director Disqualification Proceedings or a Director Disqualification Undertaking by agreement between the Director and the Insolvency Service.
The case of John Alexander Consultancy Limited offers some insight into what the Insolvency Service seems to consider is an acceptable use of a Bounce Back Loan for a company’s economic benefit:
Accounting for allowable salary payments of £5,040 from February 2020 to August 2020 and £4,000 remaining outstanding to … from February 2020, at least £18,560 of the BBL was not used for the economic benefit of the company… Accounting for allowable salary payment totalling £11,520 for the period September 2020 to December 2021, at least £16,534 of the BBL was not used for the economic benefit of the company On 07 December 2021, JAC was compulsory dissolved with liabilities totalling at least £80,000 which relates to amounts owed in respect of the 2 BBLs.
These two statements suggest that payments of salary (which is a trading business expense on which tax is levied) are for the economic benefit of a company.
Is the continuation of modest drawings using a longstanding combination of Dividends and salary deemed to be an acceptable use of Bounce Back Loan monies? There can be no guarantees about such payments of Director drawings through Dividends or an Overdrawn Director’s Loan Account later written off, being a permitted economic benefit use of a Bounce Back Loan even if it represents a continuation of the status quo.
Such Director drawings may suffer from the disadvantage that these companies were struggling due to the effects of the Pandemic and many may have been insolvent. In such circumstances, monies paid from a Bounce Back Loan as Dividends or through an Overdrawn Director’s Loan Account could constitute unlawful dividends. If that were to be the case it is likely to be an uphill struggle for a Director to argue it was for the economic benefit of the company. He or she would not have clean hands and be unlikely to satisfy the Creditor Duty in needing to have regard for the interests of creditors.
Author: Elliot Green
Last Updated: August 17, 2026
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