This is a subject that comes up with many business owners that we speak to, over 1.5 million Bounce Back Loans were taken but not every business is going to ‘bounce back’.

The Bounce Back Loan criteria were very favourable to both borrowers and lenders. The lender didn’t have to take any security from the borrower as the Government agreed to step in to guarantee any loans that could not be paid back. On the other hand, the borrower didn’t have to sign a personal guarantee with the bank. It was an ideal solution for everyone involved and released needed funds to businesses when they needed it.

As there were no personal guarantees required from the directors, then there could be no personal liability for the bounce-back loan if the loan goes into default and the business closes. Once a business enters into an insolvency process the lender makes an application to the government and they are repaid the money they lent out. The loan is treated as an unsecured debt in the companies liquidation and will be written off.

Bearing in mind a large percentage of insolvencies, unsecured creditors receive very little or no money at all.

Using a bounce back loan for wages

The scheme was launched in May 2020 and the application process was done online with the directors of the companies applying for a bounce-back loan to declare the following things.

1. They were running an active UK company

2. At least 50% of the company’s income is from trading;

3. You could apply for 25% of the companies turnover in the calendar year 2019, capped at £50,000. If your company was formed after 1st Jan 2019 young could estimate the companies turnover and apply for 25% of the estimated turnover, capped at £50,000

4. The bounce-back loan was to be used for the economic benefit of the business that applied for the loan and could not be used for personal reasons.

When a business took a bounce-back loan there was no personal guarantee needed so there is no risk to the director’s personal assets if the business does not recover.

It’s important that directors understand that there are a number of requirements such as keeping to the terms and conditions of the bounce back loan and keeping up with their fiduciary duties as a director of a company.

There have been many cases reported where business owners have misled the lender and breached some or all of the above points. This is where the borrower is likely to be made personally liable when it comes to their bounce back loans.

There are a number of key reasons that we are seeing where a director is being made personally liable for a bounce-back loan are:

– When a Bounce Back Loan was taken when the company did not qualify, it may have been classed as an ‘undertaking in difficulty’ in December 2019. This is defined as a business that could not pay its debts when they fell due or the liabilities of the company were more than the company assets. If this was the case for your business in December 2019 then it could be argued that you should have never applied for the loan.

– When the Bounce Back Loan has been misappropriated and spent on things other than the economic benefit of the business. Yes, this means a house extension, a new car, holidays, buying a property, lending it to another company, and buying a plane. Yes, you have heard that right there was 1 instance I have been made aware of where the director used the money towards a plane! The loan was provided on the basis that it would be used for the ongoing benefit of the business. The loan could have been used to pay HMRC, buy stock, invest in new equipment, the loan should have been used for working capital. Some directors have used the loan to clear debts where they have signed a personal guarantee and this could land the director in trouble as the payment would be seen as a preference payment in a liquidation scenario. See below for more information on this.

– When the directors falsified turnover in order to apply for a larger bounce back loan then they were entitled to. It was very clear on the application page that a director could only estimate turnover if they have been incorporated after 1st January 2019. If you were incorporated before that date you were able to apply for 25% of your turnover in 2019. The banks are no also retrospectively checking applications and taking action against the directors who are suspected of committing fraud.

– Preference Payments- A preference payment is a transaction that puts one creditor in a better position than the other creditors. This could be using the bounce-back loan to pay back debts that are personally guaranteed over other creditors where a personal guarantee was not given. Another example of a preference payment is repaying a director’s loan instead of using the money to help this business ‘bounce back’. This payment was clearly only in the interest of the director and not the company or more importantly its creditors.

Overdrawn Directors Loan Accounts – Many directors used all their bounce-back loans as wages. This is a tricky one because bounce-back loans were allowed to be used as salary, but to be classed as the salary the money needed to be paid through the PAYE scheme. Many directors didn’t do this and continued to take the normal monthly amount from the business even when the business was either closed or revenues had fallen significantly. You can only take a dividend from a company that is making a profit. If you have continues to take money from the company when cash flow was tight or non-existent then it’s highly likely you have accrued an overdrawn directors loan account and in a liquidation scenario, an insolvency practitioner would look to recover this amount from the director personally. This is the type of situation that can end up in the bankruptcy courts as insolvency practitioners have a duty to recover these amounts to help creditors recover some money.

Also if a director has increased their salary to an abnormal amount after taking the bounce back loan they could also see themselves in breach of the bounce back loan terms.

If anything written above has caused you concern then it’s imperative that you take advice early, our team at 1st Business Rescue can help you understand your situation in full and go through your options in an easy-to-understand manner.

Don’t bury your head in the sand, if your business is struggling financially you need to act responsibly and seek professional advice, the earlier you speak to someone the better the outcome usually is.

If you are worried about this and are considering closing your ltd company then join me at 12 o’clock today for a FREE webinar.

I’ll be explaining everything that you need to know about a company closure and what you must check before you make any decisions.

Register here.

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