The Bounce Back loan scheme (BBLS) was introduced by the UK government during the covid pandemic 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.
Unsurprisingly, there were certain conditions attached, one of which was that the loans were not to be used for personal circumstances, but were only to be used for the benefit of the company.
Unfortunately, some directors misused bounce back loans and now find themselves facing legal action from the Insolvency Service. In this article, director disqualification solicitor Eleanor Stephens discusses what you can do if you are a director facing disqualification.
Contents:
- What counts as misuse of a Bounce Back Loan?
- Who can be disqualified?
- What records should directors keep to prove appropriate use of Bounce Back Loan funds?
- What factors does the Insolvency Service look at when reviewing Bounce Back Loan use?
- Are Bounce Back Loans treated differently from other company debts in insolvency?
- How might a bounce back loan lead to disqualification?
- Can directors be personally liable for a Bounce Back Loan if the funds were misused?
- If multiple directors approved a Bounce Back Loan, who is held responsible for any misuse?
- How long after insolvency can the Insolvency Service start disqualification proceedings related to a Bounce Back Loan?
- Is it possible to settle with the Insolvency Service?
- What are the personal and professional consequences of being disqualified as a director?
- Summary
What counts as misuse of a Bounce Back Loan?
Common examples of misuse of bounce back loans include:
- using the loans for personal purposes rather than for the benefit of the business
- making multiple applications with different lenders even though the scheme only entitled a business to one loan
- providing false information on applications, such as requesting loans for dormant companies or fabricating the turnover figures of the business
- avoiding repayment of the loan, sometimes by dissolving the company.
Who can be disqualified?
Registered directors: any person who was a registered director can be disqualified, whatever their role in the company, therefore both executive and non-executive directors can be equally targeted.
Shadow directors: In order to catch situations where the person really running the company is not officially registered as a director, this regime also applies to ‘shadow directors’. These are the people who really pull the strings and make the decisions relating to the company. Despite a common misconception, it is really not possible for a director who is disqualified to put their wife/husband in as the registered director but really continue to run the company themselves.
De factor directors: They may not be registered at Companies House, but they hold themselves out to be directors, and most people who deal with them believe them to be a director of the company.
What records should directors keep to prove appropriate use of Bounce Back Loan funds?
Directors should keep all paperwork connected to the borrowing of the bounce back loan itself but also the use of the loan. This would include the following documentation:
- Bank statements: showing the bounce back loan funds and any payments using the funds
- Receipts, bills and invoices: showing the purchase of or payment for goods or services using the loan funds
- Communications with the lender: for examples, letters, emails, text messages regarding the bounce back loan
- Director’s loan account records: showing any personal payments made using money from the business, this account must be accurate and kept up to date
- Payroll evidence: particularly if funds were used to pay salaries
What factors does the Insolvency Service look at when reviewing Bounce Back Loan use?
The Insolvency Service will look at whether the funds were used for legitimate business purposes so will most likely want to see the documents listed out above to evidence this. They will be looking at whether the funds were used for the economic benefit of the business or for personal gain and to do this will want to explore any transfers of the funds to personal accounts, payments to friends and family or the purchase of personal assets.
Are Bounce Back Loans treated differently from other company debts in insolvency?
Bounce back loans are classed as an unsecured debt so the lender does not have a specific claim to any of the company’s assets. These loans did not require the company or its directors to provide any security in the form of charges against company assets or personal guarantees. This means that, provided there is no question of misuse of the loan, a liquidation process would spell the end of the bounce back loan debt.
How might a bounce back loan lead to disqualification?
Any misuse of the bounce back loan scheme could lead to director disqualification if the Insolvency Service can show that the director concerned was involved in misconduct to the extent that they are unfit to be concerned in the management of a company.
Can directors be personally liable for a Bounce Back Loan if the funds were misused?
Yes, even though no personal guarantees were needed when taking the loan, directors can still face personal liability if found to have misused the loan or breached the rules of the scheme.
If multiple directors approved a Bounce Back Loan, who is held responsible for any misuse?
All of the directors who approved the loan could be held responsible for any misuse of it.
How long after insolvency can the Insolvency Service start disqualification proceedings related to a Bounce Back Loan?
If a company enters into a liquidation or administration process, the Insolvency Service has a period of three years from the date of the insolvency to start disqualification proceedings against a director.
Is it possible to settle with the Insolvency Service?
It is unlikely that the Insolvency Service will reach a full settlement where the director doesn’t face any consequences for misuse of the scheme, particularly as they are keen to highlight the hard-line they are taking on misuse of the scheme.
It may be possible, to reduce or mitigate any consequences and for this reason it is crucial to engage specialist insolvency lawyers early on in any investigation to be able to achieve the best outcome.
What are the personal and professional consequences of being disqualified as a director?
A director will have to resign from any positions as a director and they won’t be able to be appointed as a new director.
On a personal and professional level, this can destroy a director’s career and lead to the director having to step down from other positions of trust, such as a trustee or school governor. It may also mean that the director can no longer belong to professional membership bodies.
Disqualification can be career-ending for many directors and often results in a loss of employment and income. In some cases, disqualified directors may even be held personally liable for company debts or losses.
As the disqualification process is public and a public register of disqualified directors is available for anyone to search, directors face personal and professional embarrassment upon disqualification. The public nature of disqualification is also likely to negatively impact any future business and career opportunities. Directors will also be worried about the threat of fines and even imprisonment if the terms of the disqualification order are breached.
Summary
The personal and professional consequences of being disqualified as a director are serious and far-reaching. If you are in any way concerned about falling foul of the rules of the bounce back loan scheme or if you are facing an investigation by the Insolvency Service, then our team of experienced lawyers can provide you with the expert support and guidance needed to deal with such investigations and where necessary, navigate any issues raised by the Insolvency Service.
