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, with no personal guarantees and quick and easy to apply for. This ensured access to capital for thousands of small and medium sized enterprises (SMEs).
We are hearing that some people have been applying for bounceback loans for their companies and then using the money to pay off debt either for the company or personal debt.
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.
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But surely we are in a different world now?
Yes, and no! The government has relaxed insolvency rules regarding wrongful trading ie directors could be expected to try and trade through this difficult time as it is impossible to make the same sort of judgements that you would normally take pre pandemic. But 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 these bouncback loans next year.
The bounceback loan was a loan to the company, not to you as an individual, even if you are director and sole shareholder. Therefore to use the loan to pay off personal debts is pretty much fraudulent. If the company cannot pay back the loan 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.
If you need a way to deal with personal debts then Debt Management Plans, an IVA, or Bankruptcy are the way forward!
Categories: Implications for Directors
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Please note that the guide was mostly written pre Covid-19 and there have been some changes to insolvency legislation that limits creditors actions and relaxes rules regarding wrongful trading. A new 20 day moratorium for distressed businesses has also been introduced.