If your company defaults on a bounce back loan, are you personally liable for bounce back loan debt as a company director?
Two years on from the introduction of bounce back loans, this is one of the questions we are most frequently asked. So, what happens if you can’t pay your bounce back loan?
Well, the terms for bounce back loans were created to be supportive to directors, and because they were 100% backed by the government, there are no personal guarantees. That means if you can’t pay your loan or if your company enters liquidation despite having a bounce back loan, directors aren’t usually liable.
However, as with everything, there are a few exceptions. Read on to find out more…
Bounce back loans: the facts
Bounce back loans were introduced in May 2020 to help businesses survive the coronavirus pandemic and have given small businesses access to more than £14 billion since the scheme was launched.
Under the bounce back loan scheme, businesses could borrow up to 25% of their turnover to a maximum of £50,000. The loans have a very low interest rate, and the government guaranteed 100% of the loans – meaning that if the company in question was to fail and enter liquidation, the lender can get their money back from the government.
However, despite the fact that personal guarantees weren’t sought, there are still certain conditions that must be met to ensure that directors aren’t personally responsible for the loans.
Conditions of the bounce back loans
In order to ensure that you aren’t personally liable for bounce back loan debt as a company director, you essentially need to adhere to your duties and responsibilities as a director and stick to the rules about how bounce back loans can be used.
The whole idea of bounce back loans was to provide capital quickly for companies that needed it. As such, the loans were intended to be used for things such as paying staff, investing in equipment, investing in stock, and refinancing other high-interest loans that might have been having a negative impact on the company cash flow.
What’s more, if the business wasn’t viable or if it was showing signs of insolvency prior to the pandemic, the loans should not have been applied for full stop.
So, when could a director be personally liable?
It has been estimated that 40% of companies will not be able to pay back their bounce back loans - and as the UK government will be keen to get as much money back from the bounce back loan scheme as possible, it is highly likely that the behaviour of directors will be very closely looked at.
Instances in which company directors could become liable include if they have acted irresponsibly or fraudulently. If you have taken the bounce back loan out of the company to spend on a car, a holiday, or to put towards general living expenses, for example, this would count as acting irresponsibly. However, if you have used the loan to repay personal debts, for instance, this could be deemed as fraudulent.
In any of these circumstances, if your company cannot pay back the loans and it is concluded that the loan was “stolen” from the company, you as the director would then become personally liable for the debt. What's more, you could even risk being disqualified from being a company director all together.
Preference payments and the misuse of loans
Preference payments are another example of misuse of a bounce back loan. Although company directors are permitted to use bounce back loans to refinance existing debt, you must be careful not to make preference payments by repaying some creditors rather than others.
For example, if the loan was only used to repay debts that have been personally guaranteed by a company director whilst other liabilities have been left unpaid, this would be a breach of the director’s duties and the director could then become personally liable for the debts under the terms of section 239 of the Insolvency Act 1986.
What about sole traders?
Unfortunately, sole traders do not benefit from the “corporate veil” – that is, the legal separation between personal and business finances that the limited company structure offers. As such, as a sole trader, any debts – including bounce back loans – belong entirely to the individual.
If you default on a bounce back loan as a sole trader, then, you are rendered personally liable for the debt. However, the good news is that the British Business Bank has clarified that no recovery action can be taken over a principal private residence or a primary personal vehicle for sole traders that have defaulted on bounce back loans.
How McAlister & Co can help
If you have any further questions about bounce back loans and personal liability, including what happens if you take more of your loan than you are legally allowed, what to do if you can’t pay your loan, or how to close your company with a bounce back loan, McAlister & Co can provide free confidential advice.
As business insolvency experts, our team of advisers have years of experience in business rescue and turnaround solutions and can offer completely impartial advice with absolutely no obligation. Don’t suffer alone; we’re here to help.
Contact McAlister & Co today and let us help you start to take back control.
