Bounce Back Loans and the risk of personal liability
As many will be aware, following the widespread criticism of the Coronavirus Business Interruption Loan Scheme (CBILS), the Government responded with the launch of the Bounce Back Loan Scheme (BBLS) as a faster, more accessible alternative.
Bounce Back Loans are aimed at, but not limited to, smaller business and give access to loans worth up to 25% of its turnover to a maximum of £50,000. They are provided interest-free for the first 12 months and are 100% Government backed lowering the risk for lenders.
Take up has been significant – there were 130,000 applications in the first 24 hours and loans of worth over £2bn were lent during this initial period.
Interest-free loans, Government-backed...what’s the risk?
Due to the ease of the application and the generous payment terms there is a risk that many will view Bounce Back Loans as ‘free money’. This is, of course, not the case and directors must remember it is the responsibility of the Company to pay back the loan once monthly repayments begin following the initial 12-month grace period.
When the ease of application is coupled with the fact that the Company directors will not need to provide a personal guarantee, it doesn’t take a great leap of imagination to recognise that some directors may take advantage of the scheme to repay themselves or personal debts.
The assumption may be that if the Company is unable to recover from the impact of Covid-19 and subsequently enters into a formal insolvency process, then responsibility for repaying the Bounce Back Loan will remain solely with the company and liability cannot and will not be transferred to directors.
However, this will not be case if the directors have acted improperly and breached their fiduciary duties or abused the loan scheme. Whilst wrongful trading provisions have been temporarily suspended in response to the Covid outbreak other provisions of the Insolvency Act and Companies Act remain in full force and operation.
Directors therefore need to be mindful of potential misconduct and preference payments. The Bounce Back Loans can be used to refinance existing liabilities, although caution needs to be exercised if you are planning on doing this. Take for example a company which has a significant amount of existing debt which is owed to a variety of creditors and an element is personally guaranteed or personally owed to the director or their associates. In this example, if the director chooses to pay off only that debt with a personal link leaving unsecured creditors unpaid, then this is likely to be seen as an act of misfeasance through the making of a preference.
Such a transaction is likely to be challenged by any appointed Insolvency Practitioner and could lead to possible personal liability for repayment.
If as a Director you are considering taking out a Bounce Back Loan, particularly if you are intending to use these funds to pay back existing borrowing, it is important to take advice from a licensed insolvency practitioner beforehand to remove the risk of inadvertently falling foul of the rules surrounding preference payments and other potential actions Obtaining early advice will be an added layer of protection in the unfortunate event the Company is subsequently placed into insolvency.
You can arrange a consultation with Ian McCulloch at Begbies Traynor by calling on 01772 202000 or 07854 031177.