What is the Bounce Back Loan Scheme (BBLS)
The Bounce Back Loans were aimed at smaller businesses and were loans of up to £50k 100% backed by the government, which were quick and easy to apply for. You could apply for the loan on the basis of your trading in the last 2 years or predicted trading this year. This ensured access to capital for thousands of small and medium sized enterprises (SMEs). The big advantage of the Bounce Back Loan for directors is that lenders were not allowed to ask for personal guarantees. However, just because they didnt ask for guarantees doesn't mean that under no circumstances would you per personally liable to pay them back if the company couldn't
What could the loans be used for?
The whole idea of the loan was to provide capital quickly for companies adversely affected by the pandemic. The loans were to be used for paying staff, investing in equipment, stock, and refinancing expensive loans that might have been a drag on the business. It could be used to pay directors salaries if, and it is a big if, the company was viable and the previous profits of the company warranted such payments. So, if the business was not viable or was pretty much insolvent prior to the pandemic then the loans should not be applied for. Yeah right.. Given the crisis that was engulfiing the country it is not surprising that everyone applied for the loans and were maybe "economical with the truth" or exaggerating expected sales when filling in the application. The problem is though that when directors did apply they did have to declare that the business was not "an undertaking in difficulty" As per the EU State Aid Rules this is defined as:
- had accumulated losses greater than half of their subscribed share capital (for limited liability companies) or capital (for unlimited liability companies)
- had entered into collective insolvency proceedings or fulfilled the criteria to be put into collective insolvency proceedings
- had previously received rescue aid that was yet to be reimbursed or (in the case of a guarantee, terminated)
- had received restructuring aid and were still under a restructuring plan
Under What Circumstances Could A Director Become Personally Liable For The Loan?
It makes sense to pay off company debts, when you can, but you must be very careful if you do this to the detriment of other creditors. So if you use a bounceback loan to pay off your brother who lent you money to the company a few years ago, rather than HMRC or the bank loan, then you are in effect creating a preference. I.e. prefering one creditor to another and this can be reversed by a liquidator at a later date, up to 20 years later!. These rules apply if the company is insolvent ie failing any one of the 3 tests. Although this action may not make you personally liable it will certainly have an impact if the liquidator starts to demand money from family members as outlined in the aforementioned scenario.
If you take the Bounce Back Loan out of the company account and spend it on yourself for a holiday/car or just general living expenses then this could be regarded as the directors acting irresponsibly. However, be aware that if you have used the loan to pay off personal debts then that is pretty much fraudulent. If the company cannot pay back the loan then the bank, or a liquidator, may well investigate where it went and conclude that it was "stolen" from the company. The veil of incorporation will be lifted and you will be personally liable for the debts. In addition, you may well be disqualified from being a director of a company. So, basically it is not worth it.
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But surely we are in a different world now?
Yes, and no! The government has reinstated the insolvency rules regarding wrongful trading and it has not relaxed other parts of the insolvency legislation such as the creation of a preference. So if your business was/is insolvent, which in legal terms probably was as the pandemic took hold, then the rules still apply.
The UK government will be keen to get money back from the Bounce Back Loans Scheme. Given that they estimate that 40% of companies will not be able to pay them back they will look closely at the behaviour of directors.
Can a Bounceback Loan Be Written Off?
The Bounce Back Loan was a loan to the company, not to you as an individual, even if you are director and sole shareholder. Consequently, if the company goes into liquidation or administration then the loan will be written off as well as the company ceasing to exist.
If you need a way to deal with personal debts then Debt Management Plans, an IVA, or Bankruptcy are the way forward!