What you need to know to keep business and personal finances separate

We’ve previously explained what a bounce back loan is and how they affected the borrowing company if it subsequently went into liquidation. 

A directors guide to personal guarantees

The bounce back loan (BBL) was designed with speed in mind

In order for the thousands of small and medium sized enterprises (SMEs) that would be in most need of funds, the BBL was designed to be relatively quick and easy to apply for, with a maximum initial limit of £50,000 less security checks than standard business borrowing products and a 100% government guarantee to give lenders peace of mind about storing up future bad debt liabilities. 

The primary purpose of the BBL is to give businesses liquidity to continue their day to day operations which can be interpreted in a variety of ways depending on the company.  

Some would have been in such distress that the BBL could be used to cover staff wages and regular bills whereas others would use it to pay down other company debt. 

The key word here is company. If a BBL is used to service any personal debts then this would be considered as fraudulent in any subsequent investigation.

But what about areas where the law is less clear?

Ltd – what limited means for a company and its directors

Limited company directors already have some legal protection from creditors thanks to the company structure. 

The exception is that if a director gave a personal guarantee for a loan or any other borrowing then this would become their personal liability in the event of any insolvency procedure. 

The bounce back loan doesn’t require a personal guarantee to obtain so would not repayable should the company enter liquidation. 

As the BBL is 100% security backed by the government, the lender would claim their funds back from them who would then become an unsecured creditor to the insolvent business and would be paid their share out of any remaining funds once the business had been liquidated and any assets sold off.  

But there are a couple of exceptions baked into the BBL terms and conditions that you should be aware of that would have personal implications for directors. 

The first is that there is a clause on the application which asks the applying director to confirm, in writing, whether the business was in financial difficulty on 31st December 2019. 

Anyone who signed this while knowing, or with reasonable certainty that they should have known, that the business was insolvent or in difficulties could leave themselves open to personal jeopardy that would almost certainly be detected in any subsequent investigation made by an insolvency practitioner into a distressed company.

Penalties for offences not only include fines and director disqualification but in the event of fraud could even lead to imprisonment. 

If a business subsequently goes into liquidation or other insolvency process, the practitioner will, as a matter of course, look into the immediate chain of events before the decision was made. With the exception of wrongful trading (which has been temporarily exempted), the directors of a company need to make sure they comply with all other company legislation.

Wrongful trading will return one day

Wrongful trading rules, while temporarily suspended, are expected to return sometime in 2021. But businesses operating while insolvent during the term of the BBL will have to have kept accurate records to show they were doing so as a result of the pandemic.

In short, bounce back loans are not personally guaranteed, so if your company can’t afford to repay them, and no rules were broken in obtaining the loan, you will not be held personally liable for the loan if the company has to enter liquidation. 

Directors have had the toughest 12 months imaginable and while there have been unprecedented support measures rolled out, sadly, these might not be enough to save every business. 

As long as directors have done their level best to uphold their legal and professional duties, they’ll be in a prime position to regroup and recover as the lockdowns lift and trading conditions hopefully improve dramatically. 

If you’re at all worried and would like some professional reassurance then you can contact us at your convenience

Our experienced advisors will quickly be able to assess whether there is any potential liability for the individual or the business, and if so, what steps you can take to quickly rectify matters.