Article written by Adina-Leigh Collins, Litigation Solicitor
What is a Bounce Back Loan (“BBL”)?
The Government introduced Bounce Back Loans in 2020 to help support businesses during the global COVID-19 pandemic. These loans were intended to be used for “the economic benefit of the business”.
A business could borrow up to 25% of their turnover, with the maximum amount available to borrow being £50,000. Under the rules if a business was set up in 2019, it could borrow monies based on its estimated turnover.
The scheme was 100% guaranteed by the Government. A business could choose to repay the loan over either a 6 or 10 year period, and repayments did not have to start until 12 months after the business received the funds. Interest on the loan also did not start to accrue until after the first 12 months.
However, many businesses struggled to meet their repayment obligations. This has resulted in formal payment demands being sent or, following liquidation of a company, letters of claim alleging ‘misfeasance’ being sent to former directors. In more serious cases, the Secretary of State may seek a directors’ disqualification order.
What happens if a Bounce Back Loan is not paid?
In the first instance, the business is the entity liable to repay the BBL. If the business is unable to meet the repayments, then the usual debt collection options are available to the lender.
This can include issuing proceedings in the County Court for a judgment, with further action if necessary to enforce that judgment. Or, more likely, insolvency proceedings, namely winding up proceedings to liquidate the business where the borrower is a limited company, or bankruptcy proceedings where the business is, for example, a sole trader entity.
Most commonly, in our experience, the company has entered a Creditor Voluntary Liquidation (“CVL”) whereby the company has deemed itself insolvent and has agreed to appoint a liquidator to place the company into liquidation.
In the context of a limited company, following the liquidation of the company, if the BBL is not repaid, or has only been repaid in part, whatever remains outstanding is written off, once the company is liquidated.
However, it is open to a liquidator to pursue a claim against a former director to repay these sums if the liquidator forms the view that the director, in obtaining or dealing with the loan breached his or her duties to the company. This is commonly referred to as “misfeasance claims” or alternatively, claims pursuant to section 212 of the Insolvency Act 1986. It is also open to the Secretary of State to recover the unpaid loan by seeking director disqualification compensation orders.
My company is in liquidation, can I be made personally liable to pay back the Bounce Back Loan?
Whilst a director of a limited company is usually protected from company debts, where there is evidence the BBL has been misused or obtained by providing false information to the bank, a director is at risk of being personally liable. Such examples include:
- Overstating the business turnover in the initial BBL application, or subsequent “top up” application to obtain the maximum amount available.
- Mis-applying the funds. The BBL must have been used for the “economic benefit of the business” to help with the day-to-day operations. If the loan was used for personal purposes, then this will be considered a misuse of the funds and against the rules of the scheme.
- Diverting the funds elsewhere, for example to another company/third party. Unless it can be shown the funds were used for the benefit of the business, it may be difficult to explain that giving the funds away was not a misuse of the funds.
What might happen?
Action by the liquidator
If there is evidence that the BBL was misused or obtained by providing false information to the bank, then the liquidator of the company may take action against the director for an order that the director personally repay the funds.
It will be necessary to consider exactly what the BBL was used for in order to consider any possible defences and/or counter arguments. These cases are, by their nature, fact sensitive.
Action by the Secretary of State
The Secretary of State (SOS) can issue directors disqualification proceedings if there is a possibility that the BBL was incorrectly obtained or applied. The SOS can seek an order or an undertaking that a person be disqualified as a director for a period of between 2 and 15 years.
Since COVID-19, the SOS can also seek a compensation order or a compensation undertaking, stating that the director must repay the BBL personally, as well as instigate criminal proceedings.
I don’t believe I misapplied the Bounce Back Loan but I am being made liable to pay the company anyway and a lot more than the BBL debt?
It is possible that the company’s accounts also evidence an overdrawn director’s loan account and/or other misapplication of company funds or property. Accordingly, the company’s liquidator may also pursue a director for “misfeasance” pursuant to section 212 of the Insolvency Act 1986.
This is a separate matter to the BBL, though, it is common that the BBL liability resulted in the company’s insolvency, which has led the liquidator to the overdrawn director’s loan account and possible misfeasance action.
Again, as to the possible defences available, this is dependent on the case and if you or anyone you know has received correspondence either from a liquidator or the Insolvency Service, please do get in touch.
Our specialist Insolvency team have extensive experience assisting directors faced with allegations of misfeasance and director disqualification proceedings, not just arising from Bounce Back Loans. For more information, feel free to email me or my colleague Bimal Kotecha. You can also contact us via our website here.