The Bounce Back loan scheme was introduced by the UK government during the covid pandemic in 2020 in order to support small and medium sized businesses during the coronavirus (COVID-19) pandemic, to help with temporary cashflow caused by lockdown and the general downturn.
The Bounce Back loan scheme allowed small and medium-sized businesses to borrow between £2,000 and £50,000. The amount available was based on the company’s turnover, and the company was allowed claim a maximum of 25% of turnover up to a maximum loan of £50,000, at a low interest rate which was guaranteed by the Government. No interest was charged for the first 12 months and neither the company nor the directors were required to provide any security to the lending bank, this was guaranteed by the government.
Unfortunately, due to the current economic climate many businesses find themselves in a situation where they are unable to pay the bounce back loan to HMRC. In this guide, Insolvency Solicitor, Eleanor Stephens discusses whether you are personally liable for the debt and what insolvency options you have available to you, if your business can not repay the debt.
- Can I be personally liable if the business is unable to repay the loan?
- What should I do if my business cannot repay the loan?
- Can I just dissolve the company?
- Can I put my company into liquidation or administration if I have an outstanding bounce back loan?
- Do I have to repay money owed under a Bounce Back loan if the company in liquidation or administration does not have enough funds to repay it in full?
- What might be considered misuse of a Bounce Back loan that may incur personal liability?
- What can happen if a director is found to have misused their Bounce Back loan?
- What can I do if I think I may have breached the terms of the loan or cannot repay the loan?
Can I be personally liable if the business is unable to repay the loan?
If you took out the loan under a limited liability company, then the simple answer is no, you will not be personally liable as you will not have been required to provide a personal guarantee, and you have the benefit of limited liability protection. However, there are certain circumstances where you may find yourself personally liable, which we look at in more detail below.
What should I do if my business cannot repay the loan?
If the business is unable to repay the Bounce Back loan then the company will inevitably be insolvent. This means that the company is unable to pay its debts as and when they fall due. If there is no reasonable prospect of recovering the financial situation for the company, you will need to consider the options for the business as soon as this is clear.
It is important that you address this issue immediately. The longer you trade knowing the business is insolvent, the more risk you have personally as a director of the company under insolvency legislation. For more information on this see: Directors duties: what are they on insolvency, and how can a director avoid personal liability for breach? We recommend at this point that you contact one of our insolvency solicitors to discuss the position, and we may also put you in touch with an insolvency practitioner to discuss your options. There are many excellent insolvency practitioners we work with who are happy to have a no obligation chat with you.
Can I just dissolve the company?
Sometimes directors have sought to avoid the formal insolvency process, and the investigation into the director’s actions this may bring, by applying to dissolve the company without using an insolvency process to wind up the company properly first, hoping to avoid any scrutiny by a liquidator or the Insolvency Service.
We strongly recommend against trying this. A company that still owes debts should not be dissolved without first resolving the situation through a formal insolvency process. HMRC (a government dept) guarantees the Bounce Back loan scheme, and Companies House (a government dept) is responsible for assessing company dissolution applications. It is therefore very unlikely that such a move will not be noticed.
In addition, at the end of 2021, the government introduced new legislation specifically to stop directors trying to avoid insolvency investigations by moving straight to dissolution before liquidation. The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 gives the Insolvency Service the power to investigate directors of companies that have been dissolved. This new legislation closed a legal loophole where previously the Insolvency Service only had powers to investigate directors of live companies or those entering a form of insolvency. This was brought in specifically to act as a strong deterrent against directors misusing the dissolution process in order to try to avoid an investigation into their actions.
Can I put my company into liquidation or administration if I have an outstanding bounce back loan?
The simple answer is yes. When a company is unable to pay its debts as they fall due, or is balance sheet insolvent with no reasonable chance of recovery, it is the duty of the directors to cease trading and to move to a formal insolvency process, such as liquidation (also known as company winding up) in order to prevent any further build-up of debt owed to creditors.
Liquidation or administration can only be carried out by a licensed insolvency practitioner. In very simple terms, that person will be appointed as a liquidator or administrator of the company, and from that point on they will take over the management of the company. Their role is to collect in all of the assets of the company, pay outstanding creditors as far as possible with those assets, and then close the company down when all issues have been dealt with. If there is not enough money to repay creditors, including the government Bounce Back loan, then those creditors will unfortunately bear the brunt.
Do I have to repay money owed under a Bounce Back loan if the company in liquidation or administration does not have enough funds to repay it in full?
As you can see from the above paragraph, the simple answer is no. However, there are some exceptions. A liquidator or administrator is under a statutory duty to investigate the directors’ actions in the period leading up to the liquidation or administration, and can go back over the past couple of years to review the company’s transactions. If they find that a director has not acted within their statutory director’s duties, they have powers to ask a director (or others, depending on the circumstances) to pay money back into the company that should have remained within the company for the benefit of all of the creditors but for the directors’ breach of duties.
An example might be if assets are moved out of the company without receiving reasonable value for those assets (known as a transaction at undervalue). When it comes to the Bounce Back loan, a liquidator or administrator may be able to recover Bounce Back loan scheme money that was misused by a director, from that director personally.
What might be considered misuse of a Bounce Back loan that may incur personal liability?
Because the Bounce back loan scheme was brought in so quickly, and was intended to help businesses in need, it very much relied on the integrity of directors applying for the loan to tell the truth and use the loan responsibly. For this reason, when applying for the loan, directors just had to self-certify that the company met the eligibility criteria. This meant confirming they met the turnover requirements to obtain the loan (turnover had to be a minimum of £200k per annum to acquire the top £50k loan), and confirming they were trading on the relevant date (1 March 2020), among others. The loan had to be used for the benefit of the company only and could not be used for any personal benefit. Checks were not carried out by the lenders, due to the urgent need of the loans to be distributed at the time, and probably also because the loans were fully guaranteed by the government.
In the nature of these things however, many of the Bounce Back loans were misused by directors, including being somewhat ‘elastic’ with the eligibility criteria. Some who claimed the loan were not even trading, while others fell well short of the turnover criteria. The government has pledged to come down hard on abusers of the scheme.
Misuse of a Bounce Back loan may be as straightforward as a director using the loan for their own personal benefit. For example, using the money for an extension to their house would be a very obvious breach which could be recovered from a director personally by a liquidator as a transaction at undervalue, or a misfeasance or both. Misfeasance is a general breach of the duties of a director.
A far more common misuse of the Bounce Back loan scheme that directors should be careful to avoid is when a director uses the loan to repay existing finance, particularly where they are potentially personally liable for that finance. For example, if the loan is used to pay off an existing bank loan, or repay an overdraft that the directors have personally guaranteed. This would be considered a ‘preference’ as one creditor is repaid in preference to others who are also owed money, and in the case of repaying finance that is subject to a personal guarantee, this not only prefers the bank, but also the directors personally, as it takes away their risk of the personal guarantee being called in.
What can happen if a director is found to have misused their Bounce Back loan?
A director who is found to have misused a Bounce Back loan will inevitably be asked to repay that sum by the investigating liquidator or administrator, so that the money can be used for the benefit of creditors as a whole, including to be repaid to the government.
The government are also coming down hard on directors guilty of misuse in the Directors Disqualification regime, with directors found guilty regularly receiving a disqualification period in the top bracket, so between 10-15 years. See [article] for more information.
What can I do if I think I may have breached the terms of the loan or cannot repay the loan?
The key takeaway here is to take professional advice from one of our insolvency solicitors as soon as possible. It may be possible to rectify the damage done if a Bounce Back loan has been misused, particularly if the company is able to recover financially and continue to trade. If not, then it is important at the company take the correct action to protect the creditors of the company, and take advice on the options for winding up the company in order to protect the creditors of the company, and to ensure that the directors do not breach their duties and incur personal liability. Speak to one of our experts today if you have concerns for your business.