Lots of business owners took out a bounce back loan during the pandemic in order to keep their businesses afloat. During the application, businesses were asked to prove that their business was not experiencing any financial difficulties in December 2019, and that the effects of the pandemic have negatively impacted the business. Unfortunately for many businesses, they have still not bounced back and are looking into liquidation. Many people are wondering whether you will have to pay your bounce back loan if you liquidate your company.
Unfortunately the answer to the question is that it depends on your situation whether or not you will have to pay your bounce back loan off if you liquidate. In some cases, you may be made personally liable for your bounce back loan, don’t worry, we’ll get on to those.
Bounce back loan
When limited companies applied for their bounce back loans, they were reminded that no personal guarantees needed to be signed. This meant that the loan was ideal for both borrowers and lenders. As, in the case of a business being unable to pay back their bounce back loan, the government would step in and pay the owed money back to the correct bank.
All of this means that the director of the company could not be made personally liable for the loan if the business didn’t survive. However, there are a number of situations where a director will be made personally liable for the bounce back loan.
When will I be made personally liable for a bounce back loan if I liquidate?
Bounce back loan fraud
Some businesses made the decision to take out bounce back loans when they did not actually qualify for it. Some criteria was that your company must be trading still, not in financial difficulty and you must have been negatively affected by the pandemic. If you were already in the midst of an insolvency procedure before you took out the loan, you were not able to qualify and therefore should not have taken out the loan.
Another form of bounce back loan fraud arose from businesses spending the loan on personal gains instead of things that would benefit the company. This includes directors spending the money on house extensions, holidays and other things not associated with the business. Things that you should have spent the loan on include:
- Working capital
- Paying suppliers
- Staff wages
- HMRC arrears
If it comes to light that you have spent the bounce back loan for your own personal benefit, you may have to deal with the consequences and could be liable to pay back the debt.
For newer businesses that were established after the 1st of January 2019, and therefore could not provide one year’s worth of accounts, directors were asked to estimate the company turnover in order to provide an accurate bounce back loan amount. Some businesses did this correctly, while others inflated their turnover so they had access to a larger loan. Any business that was incorporated before the 1st of January 2019 had to use their actual turnover figures. This means you were able to apply for up to 25% of your company’s turnover, with a maximum amount of £50,000. This is something that has been misunderstood by many directors and if that is the case then you must speak up and be honest. If you are found to have overestimated your turnover and you haven’t done anything about it, you could be made liable for some, if not all, of the bounce back loan.
When a business becomes insolvent, you will likely have a list of creditors who are all owed money from your company. All of your creditors must be treated equally, you shouldn’t choose to pay one over another even if they are shouting the loudest, this can be labelled as a preference payment which could land you in trouble. Some directors choose to pay the creditors that they have previously signed a personal guarantee with, which means they will not be personally liable for the credit owed. However, this is wrong and could lead to much higher levels of debt, so it really isn’t worth it.
After you appoint an insolvency practitioner, their job is to conduct a thorough investigation into your business practice and financial situation. They will be looking at your financial history from up to 3 years before you filed for insolvency to ensure things have been done properly throughout. Making preference payments to family members or creditors can lead to you being made personally liable for some or all of your debts.
Overdrawn directors loans
Having an overdrawn directors loan account essentially means that you, as the director, owe the company money. Many directors that we speak to have used their bounce back loan to supplement their income. Most directors take a salary from their company which goes through PAYE, they then top up their income using money from the loan account which is declared as a dividend at the end of the tax year. This is all well and good providing that your company is making a profit. If your business is failing to make a profit and you continue to take dividends, your directors loan will end up being overdrawn which could be an issue if you choose to liquidate your company. You will be made to pay back the money that you have taken from the directors loan account.
If you’re worried about any of the 5 reasons you could be made personally liable in a liquidation that we have mentioned in this article, please seek advice as soon as possible.