Bounce Back Loans and Personal Liability: How it Works

Debt Advice

As the Covid-19 pandemic threatened to hinder businesses across the country, the government announced Bounce Back Loans in order to help companies and their shareholders survive these challenging times.

For many, the loan was a last chance for directors to save their business. However, many businesses didn’t survive and directors started to worry whether they could be made personally liable for repayments of the loan.

What is a Bounce Bank Loan?

In order to deal with the economic crisis caused by the pandemic, the UK government created a government backed business scheme, the Bounce Back Loan (BBL).

Under the scheme, businesses could borrow up to 25% of their turnover to a maximum of £50,000.

The loans were interest free and 100% guaranteed by the UK government. Businesses could then choose to repay their loan over a 6 or 10 year period.

The whole point of the scheme was to provide capital quickly for businesses to:

Pay their staff
Invest in equipment and stock
Refinance expensive loans
Pay directors salaries

However, these terms have led to some business owners misusing the loan.

Who is liable for a Bounce Back Loan?

One of the reasons BBLs were so popular for small businesses is because there was no personal guarantee attached to them.

The government guaranteed 100% of the loan, meaning that if the company failed, the lender would still get their money back from the government.

If the loan was used sensibly, any liquidation would mean the end of debt.

However, this doesn’t mean there are zero liability issues.

Can you be personally liable for a Bounce Back Loan?

The BBL must have been demonstrably used ‘to provide an economic benefit to the business’.

If it was proven not to be used in this way, and the company cannot afford to repay the Bounce Back Loan and subsequently enters a state of insolvency, there is a risk that company directors could be held personally liable for the loan repayments.

Will Bounce Back Loans be written off if you are a sole trader?

Despite the fact that the government guaranteed BBLs, if you’re self-employed and can’t repay it, the loan is not automatically written off.

The only way to write off a self-employed sole trader’s BBL debt is to enter a formal insolvency process.

If you apply for an Individual Voluntary Arrangement (IVA), the BBL is treated as unsecured debt, which can be included in the arrangement.

Once a sole trader has repaid their agreed amount, the remaining amount of unpaid, unsecured debt will be written off.

In what circumstances would a director be made liable for a Bounce Back Loan?

Company directors could be made personally liable for BBL repayments if the business enters a formal insolvency process, such as Liquidation or Administration, and the directors have done one of two things:

Payments are made to creditors in preference

It makes sense to use your BBL to pay off company debts when you can. However, directors must be very careful in what order they pay their creditors.

If a BBL is used to pay off a friend or family member who lent you money for the business a few years ago, rather than HMRC or the bank, then you will be essentially creating a preference.

This can be reversed by a liquidator at a later date, even up to 20 years later.

These rules apply if the company is insolvent. Although this may not necessarily make you personally liable, it will have an impact if the liquidator starts to demand money from friends or family members.

Funds are not used in accordance to the loan agreement

Another way a director could be made liable is if the BBL was used and spent on themselves, such as purchasing cars and holidays, or just general living expenses which could be regarded as acting irresponsibly.

If a director used the loans to pay off personal debts, then this is fraudulent. If a company cannot pay back the loan then the bank, or a liquidator, may investigate where it went and conclude it was stolen from the company.

This will result in the veil of incorporation being lifted, and the director being held personally liable for the debts.

Directors may also be disqualified from being a director of a new company.

Who is liable for a Bounce Back Loan in a Limited Company?

Unless the director of a company is found to have used the loan incorrectly, or they have made payments in preference, limited companies are not liable for the repayment of the BBL if they cannot pay in full due to financial difficulties.

The loan is 100% government guaranteed, meaning the banks will claim the loan money back from the government, not the limited company.

However, this is under the assumption that:

The application for the loan was not fraudulent and the company met the criteria to apply for the loan in the first place.
The funds were used for the company in accordance with the loan agreement.
The directors have not breached any of their statutory obligations.

What will happen if you don’t pay your bounce back loan?

If your business has defaulted on its BBL, here’s what you should expect to happen:

You will receive a letter from the bank, as per their usual processes;
Over time, the bank may escalate towards debt collections and/or court action if the amounts are not paid. Different finance providers may differ in their policies;
Banks will suggest that businesses should refrain from seeking other finance from them in the future.

As per the terms of the BBLs, lenders are required to offer a 12-month period after they have issued formal demands to the borrower when pursuing outstanding amounts.

Who pays the bill if a Bounce Back Loan is not repaid?

If the company cannot repay the BBL because of liquidation or administration, then the loan will be written off, as well as the company ceasing to exist.

However, if you have used the loan for personal debts or you have made preference payments to friends or family members, this could be reversed by a liquidator and you may be held personally liable.

You can get in touch with our expert team for advice on Bounce Back Loans and Personal Liability.