During the height of the Coronavirus pandemic, no company emerged untouched by the effects it had on the economy. Footfall dropped sharply, people spent less, and the supply chain suffered. These factors, amongst many others, led companies across the nation to insolvency.
To counter this, the U.K government implemented Bounce Back Loans, a specialised loan intended to support struggling companies through the worst of the economic downturn, bringing them back to stability. Given the extent of the financial damage, these loans were a saving grace for many.
However, Bounce Back Loans were not silver bullets, and many companies were unable to remain open despite the provided support. In fact, 40%-50% of companies with Bounce Back Loans will default, according to U.K banks. Many of these companies will likely close, through liquidation, dissolution, or other means. For the directors of these companies, this begs the question – can they be held personally liable for these Bounce Back Loans?
In this article, Clarke bell will answer this question, breaking down the Bounce Back Loan Scheme and ensuring you know where you stand.
What are Bounce Back Loans?
Bounce Back Loans were implemented as part of the Bounce Back Loan Scheme (BBLS). These loans provided small businesses with much-needed finance, worth 25% of their annual turnover, up to a limit of £50,000. The loans were entirely guaranteed by the U.K government, with the added benefit of the first 12 months of their duration being interest-free. Given this guarantee, directors were not expected to provide security, either in the form of assets or a personal guarantee. As such, it was quite straightforward for companies to access the funds they needed.
Applications for a Bounce Back Loan
Bounce Back Loans are no longer available, with the scheme having ended in March 2021. While this scheme is off the table, there is a possibility of other, similar schemes being offered by the government if the circumstances dictate. If you intend to apply for such a scheme, you should first know how to obtain a Bounce Back Loan, as future schemes will likely follow a similar blueprint.
To obtain a Bounce Back Loan, you first had to know what you aimed to spend it on beforehand. To make an accurate plan, directors needed to know what they could and couldn’t fund. Neglecting to do so could be the cause of future problems, making your newly acquired finance more of a curse than a blessing.
First and foremost, your intended purpose must benefit the company economically. This could be to cover payroll costs, purchase stock or necessary materials, pay certain bills and operational costs, or attempt to improve the company’s cash flow. Some other less operationally-important expenses can also be paid under the right circumstances, such as director pay or shareholder dividends. If you intended to use the Bounce Back Loan on these expenses, your balance sheet will have to show a comfortable profit before you do so. Bounce Back Loans could even be used as a refinancing option. It was cheap and fairly low-risk, making it a good opportunity to pay back some other, more pressing loans.
Applying as an “undertaking in difficulty”
Although Bounce Back Loans were available to most companies in need, there were some exceptions. One such exception is known as an undertaking in difficulty. If your company can be classified as such, you would not have been able to obtain a Bounce Back Loan.
The Insolvency Service defines an undertaking in difficulty as having two criteria:
- The company’s liabilities outweigh the value of its assets
- The company cannot pay its debts as they fall due
This stipulation essentially means that you could not take out a Bounce Back Loan if you knew your company had no chance of paying it back. This was to limit the amount of money going to companies that have insolvency as a foregone conclusion, rather than prevent struggling companies from receiving aid. Your company was still expected to repay the loan and any interest, after all.
Can company directors be held liable for Bounce Back Loans?
One of the greatest advantages of Bounce Back Loans is that they did not require any form of guarantee from the borrower. As the government backed the loan, you would not have needed to provide a personal guarantee or use any assets as collateral. As such, directors would not have risked their personal finances, even if their company defaulted and could not repay its Bounce Back Loan.
While this was true in most cases, there were certain circumstances that would have led to company directors being held personally liable. Namely, directors must have adhered to the rules and regulations of the Bounce Back Loan Scheme, and must have also demonstrably performed their duties and upheld their obligations as a director. If directors failed to fulfill either of these responsibilities, they may be held liable for their Bounce Back Loan.
When can a director be held liable?
There are a couple of main instances that can lead to directors assuming personal liability. Both instances occur when a company files for insolvency, entering into a Creditors’ Voluntary Liquidation (CVL), business administration, or another such procedure.
Once in an insolvency procedure, an investigation into the conduct of company directors will be opened. This is to determine whether directors have engaged in misconduct, resulting in the company’s failure. In the context of Bounce Back Loans, this investigation is looking for two things – evidence that payments were made in preference, or that the Bounce Back funds were not used properly.
During any insolvency procedure, directors must act in the best interests of their company’s creditors, rather than shareholders. This is an obligation to all creditors; a director cannot show preference to any single creditor, but instead act in the interests of the whole. This means that directors cannot use the funds provided by a Bounce Back Loan to repay some creditors and not others. This is known as preferential repayment, which is considered director misconduct. If found, it could lead to a director assuming personal liability for the Bounce Back Loan.
The second part of the investigation concerns the misuse of Bounce Back Loan funds. Once approved, a Bounce Back Loan must have been used to assist the company, as stated in the loan agreement. If a director misused these funds, such as to pay personal liabilities, this will likely result in said director assuming personal liability for the debt.
Clarke Bell can help
If your company is unable to repay its Bounce Back Loan, or is having wider financial trouble, then let Clarke bell help. We have over 28 years of experience in helping companies solve their financial issues, and we can do the same for you. For a free, no-obligation consultation, contact our team today and find out what we can do for you.