To aid companies during the height of the Coronavirus pandemic, the UK government introduced Bounce Back Loans to supplement their finances. The loan could be used for a variety of reasons, as long as it was for the benefit of the company – as opposed to being used for a director’s personal expenditure. However, a question asked by many directors is if their Bounce Back Loan could be used to pay dividends to themselves or other shareholders.
In this article, Clarke Bell answers this question, discussing the implications of using a Bounce Back Loan to pay dividends, and what else you could have used a Bounce Back Loan for.
What is a Bounce Back Loan?
Bounce Back Loans were offered to financially struggling companies as part of the Bounce Back Loan Scheme (BBLS). The aim of these loans was to support companies, specifically small enterprises, through the worst of the pandemic. Though everyone felt the economic impact of the pandemic and the corresponding lockdown measures, small businesses were particularly vulnerable. As such, these loans were offered to try to prevent these companies from going out of business.
Bounce Back Loans offered struggling companies up to 25% of their annual turnover, with a cap of £50,000. These loans were very accessible, and were completely guaranteed by the government. This meant that borrowers were not required to offer any kind of security, nor would a personal guarantee be demanded. Furthermore, repayment would only commence 12 months after the loan was approved. A fixed interest rate of 2.5% per year would apply to the repayment amount.
Despite the favourable terms of Bounce Back Loans, many companies have been unable to make the necessary repayments. This is partially due to lockdown restrictions, and the accompanying effects on the economy, lasting much longer than both lenders and borrowers expected. This was made worse by Bounce Back Loans being given to companies that had no realistic hope of paying the loan back.
In order to make repayments easier, the government implemented the Pay As You Grow Scheme (PAYG). This afforded some companies flexibility in their repayment terms, which has helped a lot of companies to keep going.
How could Bounce Back Loans be used?
Bounce Back Loans were intended to support struggling companies. Practically speaking, this means that a Bounce Back Loan recipient should have used the loan to develop their company or cover its operational costs. This includes paying for stock, necessary equipment, staff salaries, utility bills, and some liabilities.
Bounce Back Loans could be used to pay salaries, including company directors’ salaries. Most directors work in an employee capacity of the company that they own, making it perfectly acceptable to pay their salary using the Bounce Back Loan. However, the loan could not be used to increase salaries or pay bonuses.
Can Bounce Back Loans be used to pay dividends?
In addition to paying salaries, some directors intended to use their Bounce Back Loan to pay dividends to their shareholders. While it might be easy to think this would be acceptable, Bounce Back Loans cannot be used to pay dividends. This is because the loan must be used for the economic benefit of the company in question. However, dividends do not fall under this category, unlike employee salaries.
What are the consequences of paying dividends with a Bounce Back Loan?
If you have already used to Bounce Back Loan to pay dividends to yourself or shareholders, you have violated the Companies Act 2006. As such, you could be subject to several consequences, including:
- A tax charge may be levied – If your Bounce Back Loan has resulted in an Overdrawn Director’s Loan Account (ODLA) due to dividend payments, HMRC may subject you to a tax charge of 32.5%. This tax charge applies unless you repay the loan within nine months and one day.
- Being subject to an investigation – As a director, you have a responsibility to act in the best interests of the company. This duty extends to your decision to take loans, and how you use them. If you decide to liquidate your company after taking out a Bounce Back Loan, as part of the liquidation process your conduct as a director will be subject to an investigation. This investigation will also look at how you spent your Bounce Back Loan. If you did not use it for the economic benefit of your company, you are likely to face penalties. These penalties include a disqualification of your director’s license, fines, personal liability for company debt, and even a prison sentence.
- Being reported to the National Crime Agency – If your lender suspects you have misused your Bounce Back Loan, such as paying shareholder dividends, then they are supposed to report you to the National Crime Agency (NCA). This will have significant consequences for you and your company, if you are found guilty.
What to do if you are struggling to repay your Bounce Back Loan
If your company is struggling to repay its Bounce Back Loan, or any other liabilities (such as tax or rent), you should seek professional counsel from a licensed insolvency practitioner.
They will provide you with advice and support to ensure that you take the best actions for your particular situation. Failing to act in the correct way may result in your creditors petitioning the courts to force your company into compulsory liquidation. The consequences of this can be dire, so you should act swiftly to avoid this happening to you.
A common solution for dealing with debts which a company cannot pay is a process called a Creditors’ Voluntary Liquidation (CVL). This formal insolvency procedure affords significant advantages to a company and its directors. As a CVL is voluntary, the company directors can appoint their choice of an insolvency practitioner to deal with the liquidation. They will ensure that your company is liquidated following all the relevant insolvency regulations.
With a CVL, creditors cannot take legal action against your company, meaning you are safe from compulsory liquidation once the procedure begins. Moreover, any business debts are written off in the CVL – assuming that you haven’t signed a personal guarantee as part of a loan agreement – and this includes Bounce Back Loans, provided it was used correctly.
Clarke Bell can help you
If you are struggling to pay back your Bounce Back Loan, or any other liabilities, Clarke Bell can help you.
We have more than 28 years of experience in successfully helping directors to deal with their company’s financial difficulties. We can do the same for you.
Our specialist insolvency team can help you to find the best solution for your situation, whether it be liquidation or another means.
For a free, no-obligation consultation, contact us today and find out how we can help you.