The Bounce Back Loan Scheme (BBLS) offers loans from the Government to support businesses during the COVID-19 pandemic.
It is emergency finance of between £2,000 and £50,000, interest-free for the first 12 months, after which a rate of 2.5% is applied.
To protect directors from personal liability in the case of a default, lenders cannot request personal guarantees. The company is liable for defaults, thus protecting the director’s own finances. However, this is only the case if the director has “acted reasonably and responsibly”. If the director has misused the funds, whether from the BBLS or one of the grant schemes, the personal consequences could be dire.
What can a company use ‘Covid loans’ for?
The loans are available to use for paying staff wages, including directors. They can also help with business rates and rent, and regular overheads like energy and telecoms bills. They can also be used to refinance other business debts to reduce interest costs.
Covid loans may not be used to pay dividends or place into a personal savings account to accrue interest. They also cannot be used for any purposes that do not relate to the business. Doing so would not be to “act reasonably and responsibly”, and a director could be made personally liable if the company enters into liquidation, whether voluntary or compulsory.
What happens if a director knows the company cannot repay the loan?
There have been reports that close to 50% of the emergency loans provided by the government during the pandemic may never be repaid. This would amount to a £26bn black hole for the UK Treasury.
While it is unlikely to be as bad as this, there are definitely many non-viable companies taking out these loans. Ultimately, if a company is unable to repay the emergency loan in full, it is not a big problem so long as the director has acted “reasonably and responsibly”. No-one knew how long this crisis would last and, as circumstances have changed, you should be fine if you have acted properly. However, failure to repay the loan will probably have a detrimental impact on your credit rating.
However, misuse of the funds provided by your Covid loan could have significant consequences. In particular, if the funds are used to repay any loans you introduced or pay dividends when the company cannot pay regular suppliers or creditors, this is called a ‘preference’ payment. Preference payments are against the law, as laid out in the Insolvency Act 1986.
If a company cannot repay a Covid loan, yet the directors have used it to repay other loans against which they have given personal guarantees, that is a clear preference. In this case, the director can be made personally liable for repaying the Covid loan, either by the company’s liquidator or by a Court following an audit.
Preference law is the most relevant legislation to potential misuse of Covid loan or grants, besides fraud. The latter, if discovered, would result in criminal prosecution, while the former will result in personal liability with the potential for prosecution as well, depending on the circumstances.
What if a Covid loan cannot be repaid?
If your business cannot repay a government loan, the declarations made at the application stage will be reviewed. One such declaration will be that before 2020, your company was financially sound. At this stage, your actions will be carefully considered, and if you made false declarations or misused the funds in any way, the director is likely to be made personally liable for the loan post liquidation.
If the Covid loan is the only problem, there is no big worry. The scheme allows up to 10 years to repay, with interest holidays of up to 6 months after March 2021. Most viable companies will be able to meet this repayment profile.
If, however, the inability to repay is just one of many cashflow problems, and other loans and creditors are stacking up, it may be necessary to look at other options. These include pay arrangements with HMRC, payment holidays or, in severe cases, a company debt restructure via an insolvency mechanism (CVA or administration). If the company is no longer viable, voluntary liquidation is the only option.
Things to be aware of
There can only be one application ‘per group’. Applying for more than one business under common ownership/control is fraud.
If you have received a CBILS, CLBILS or CCFF, you cannot apply for a Bounce Back Loan unless it is for refinancing one of the other loans.
The BBL is only for use to support trading or commercial activity in the UK. You MUST NOT use it for any personal activity.
If a business is in default of another borrowing facility, it will be deemed to be in default of the BBL.
Check your BBL terms and conditions before seeking any other source of funding while the BBL is in effect.
For more on the subject of the dangers that directors can face, please see https://www.ndandp.co.uk/director-disqualification/