Bounce-back loans came at a time of need and uncertainty. They were designed to help keep businesses afloat that may suffer due to the Coronavirus pandemic. In this blog, we’re looking into bounce-back loan recovery and how lenders pursue directors after company closure.
The terms of the bounce-back loan scheme
When applying for a bounce-back loan, directors needed to provide evidence that their businesses would be adversely affected by the Coronavirus closures. Many companies in the UK were affected, and for a reasonably long time.
Directors had to agree to the terms of the loan, which included details on repayments. Additionally, directors had to demonstrate that their business was not struggling financially before the pandemic-related restrictions took effect.
Applying for the loan
When applying for the loan, directors could only apply once. There were limits on the amount of money that could be borrowed. The amount you could borrow was dependent on your turnover, with a maximum of 25% of the business’s turnover or £50,000.
The loans were due to be paid back by UK businesses, and the money could only be used to benefit the company. If the money was withdrawn from a business account to a personal account, this would need to be investigated.
When applying for the loan, directors were informed of a guarantee from the government. If the company could not repay the loan and went into liquidation, the lender could recover the amount from the government, but only if the loan was used lawfully and there was no director misconduct.
The Covid loans were attached to the businesses rather than the directors when used by a limited company in the UK. This is because a limited company is a separate legal entity from its directors. In this case, it means that directors cannot be held liable for bounce-back loans, provided that they acted responsibly and in line with their director’s duties.
Using the bounce-back loan scheme
When directors applied for the government-backed bank loan, they should have read all of the accompanying documentation carefully. This documentation outlined how the loan could be used. Some of these included the following.
- Staff wages
- Paying for suppliers
- Paying for utilities
What are some examples of bounce-back loan fraud?
When the bounce-back loan was not used in the way it was intended, this could be labelled as bounce-back loan fraud. This is very serious and will not be taken lightly.
Some of the most common types of misconduct regarding the loan include the following.
- Providing inaccurate or false information on the loan application
- Using the loan for personal benefit instead of the economic benefit of the company
- Dissolving your company to avoid paying back the loan
What happens if you are found guilty of bounce-back loan fraud?
Directors who are found guilty of bounce-back loan fraud can face a range of consequences depending on the severity of the fraud. Here are some of the most common actions taken against directors who have been fraudulent.
- Director disqualification
- Fines
- Imprisonment
- Personal liability for the loan
Having to deal with any of these situations will be extremely stressful for a director.
How can lenders pursue directors if the company is closed?
Sometimes, businesses need to close due to financial difficulties or other reasons. Many of the companies which have been closed in the last few years have done so with an outstanding bounce-back loan.
Many directors will have applied for a formal insolvency procedure, which means the business can be closed even if it has outstanding debts. Some debts, such as those personally guaranteed, will not be written off, and the director will remain liable for payment.
A creditor’s voluntary liquidation is the correct way to close a company that is struggling with debts. These companies are insolvent, which means they cannot pay their debts when they fall due or their liabilities are worth more than their assets. You must appoint a licensed insolvency practitioner to handle this. Read our blog on expert liquidation advice.
Some company directors wait until it’s too late to use this method, and may be forced into compulsory liquidation. You must think very carefully before letting your business get to this point.
In the early stages of the COVID pandemic, some business directors were finding loopholes to close their companies without incurring liability. These companies used the strike-off method. This is not legally allowed and should not be attempted if you have business debts. A strike off results in the company being removed from the Companies House register.
When a company applies for a strike off or company dissolution, the creditors of the company are informed. This means they can object to the strike off. In many cases, these companies can then be forced into compulsory liquidation, and it doesn’t look good for the company directors who have tried to use this method.
The strike-off method can only be used by companies with no debts. If a company is struck off with outstanding debts, then the creditors can apply to have the business reinstated for two to five years after it’s closed. This means that you will still need to pay off any outstanding debts.
When the loan repayments began, the government launched the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021. This bill allows HMRC and The Insolvency Service to complete retrospective investigations. This means they can establish whether company directors completed the process correctly or not.
The directors who slipped through the nets and struck off their companies with debts will face the consequences, as the searches are ongoing. The government, HMRC and the Insolvency Service are legally bound to investigate company dissolutions.
What if I did not commit bounce-back loan fraud, but my company is struggling?
If your company is struggling and you have acted responsibly with the loan, then you should not worry. It’s likely that your actions with the bounce-back loan will be checked to maintain standards and procedures.
If you have acted responsibly and used the money as it was intended, then you should be able to close the company with no issues. Bear in mind that you must have acted responsibly in other ways; otherwise, you may face other issues. You must not have signed a personal guarantee or sold company assets at an undervalued price.
When your company enters liquidation, your insolvency practitioner is legally bound to check these elements and understand your debt obligations when completing a formal insolvency process. Their role is to recover outstanding debts. You may become personally liable for some of these debts if you have not acted responsibly.
If you cannot pay your bounce-back loan funds, you should speak to a professional for advice.
I think I might have committed bounce-back loan fraud. What should I do?
Limited company directors who are concerned that they may have committed bounce-back loan fraud should be honest. You will be seen in a much better light if you are honest and deal with the problem directly.
You may still face the consequences, but they may be lighter and can help you stop worrying about the situation.
We hope this blog has been helpful regarding dealing with bounce-back loan recovery. Unpaid bounce-back loans must be handled with care. You must follow professional guidance regarding company strike-offs and closures.
At 1st Business Rescue, we offer valuable guidance for directors. Contact us for confidential and trusted advice.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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