But even we’re surprised by how many inquiries we’ve been getting that centre around one specific question - can a director be held personally liable for a bounce back loan?
So we’ll take the time to do a deep dive into this question and answer it as best we can - because it’s not a strictly yes or no answer.
One reason why we think a lot of directors are becoming more nervous than they need to be about the prospect of being made personally liable for bounce back loan arrears or other debts is due to an imminent law change.
The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill has had a lot of publicity before its legal ascent probably coming before the end of 2021.
The main headlines have been the new power being granted to The Insolvency Service that will allow them to investigate directors of dissolved companies to see if there was any unsavoury activity such as striking off the company while it still had a bounce back loan or other debt.
In these specific circumstances, which could go back several years depending on the investigation, then a director who knowingly breached their legal duties, or should have known, could find themselves in trouble and facing a range of punishments including fines, disqualification of up to 15 years as well as being made personally liable for improperly incurred debt including bounce back loans.
The key point to remember here is that a bounce back loan had a wide-ranging remit for use - to provide an economic benefit to the business during the pandemic.
This criteria could be met in many ways including staff costs and wages, new plant or machinery purchasing, investing in tangible assets or being used to pay down existing debt.
It would also be perfectly legal for a business to have borrowed the lump sum and put it all into a savings account and not spent a penny - as long as they make the agreed repayments when they fall due.
Some directors are worried because they spent the money they borrowed - which was the original purpose! - then they might be in trouble.
As long as they can demonstrate that it was spent on reasonable and legitimate company business, and not on a range of supercars for directors for example, then they will have little to worry about.
If the business is clearly unviable or cannot pay its accrued debts and the only realistic way forward is through liquidation then the bounce back loan will be treated as any other type of unsecured borrowing and will be written off.
Unlike the Coronavirus Business Interruption Loan Scheme (CBILS) where the government guaranteed 80% of the loan and the bank could seek a personal guarantee from directors for the remaining 20%; a bounce back loan was 100% guaranteed.
This meant that even if the business was liquidated and the loan couldn’t be repaid in full, the bank would still be able to claim back its capital providing it could prove it had made a reasonable attempt to reclaim the loan.
In any liquidation, the insolvency practitioner has to provide a report on the directors actions leading up to the insolvency event and will be satisfied if the directors can provide a reasonable and logical explanation, with evidence, for how they used the bounce back loan to support the company.
If they have any questions, they will raise them with directors before submitting the report giving them ample opportunity to put their version of events and iron out any areas of confusion.
The picture is slightly different when it comes to sole traders as their trading structure doesn’t recognise any legal separation between the company and the individual.
Any debts incurred will fall onto the individual including any bounce back loan debt but an insolvency practitioner will be able to go through any alternative arrangements a sole trader could benefit from including an Individual Voluntary Arrangement (IVA) which could avoid any outright defaults.
Even if a sole trader does default and has to ultimately pay back the sum through other methods the British Business Bank has stated that “no recovery action can be taken over a principal private residence or primary personal vehicle for sole traders that have defaulted on bounce back loans.”
The only other circumstance in which the director of a liquidated company could potentially be made personally liable for a bounce back loan is if it was used to make preferential payments to creditors.
In this scenario, a director would have borrowed and used the loan to refinance existing debts by paying off only those that had been personally guaranteed by them while leaving other liabilities to go unpaid.
As well as being a breach of their director’s duties and obligations, in the event of a subsequent liquidation, this could be seen as a preferential payment and they could ultimately be made personally liable to repay these debts.
A bounce back loan doesn’t have any personal guarantees attached and the bank will ultimately be able to reclaim 100% of the loan from the government in the event of a liquidation and this and other debts being written off.
Then there will be no personal liability incurred from the bounce back loan and it will be closed for good as part of the liquidation process.
Bounce back loan arrears are just one area of concern that directors might be focussing on at the moment.
If your business has problems with VAT debt repayments, overdue HMRC arrears, issues with the end of the furlough scheme or other hurdles that seem too high to overcome right now - get in touch with us today.
Our free initial consultation for business owners and directors provides them with the chance to talk to an insolvency professional discreetly and honestly about what they and their business is going through.
Once we get a clearer understanding of the immediate issues and difficulties they’re tackling, we can help them create an effective and efficient strategy, including some actions that can be implemented immediately.
Then we can focus on solutions for the next most immediate and challenging problems while the directors can once again dedicate their time and energy to looking to the future.