Article written by Adina-Leigh Collins
What is a Bounce Back Loan (“BBL”)?
The UK government introduced Bounce Back Loans in 2020 to support businesses during the COVID-19 pandemic. These loans were designed to help businesses with their ‘economic needs’.
A business could borrow up to 25% of its annual turnover, with a maximum loan amount of £50,000. If a business was established in 2019, it could still borrow based on its estimated turnover.
The scheme was fully backed by the government, meaning the loan was 100% guaranteed. Businesses had the option to repay the loan over a 6 or 10-year period, and repayments didn’t need to start until 12 months after receiving the funds. Additionally, interest on the loan didn’t begin to accumulate until after the first 12 months.
However, many businesses found it difficult to meet their repayment obligations. As a result, formal demands for payment have been issued, or, in cases of company liquidation, former directors have received letters of claim alleging ‘misfeasance’. In more severe instances, the Secretary of State can seek to pursue a director’s disqualification order.
What happens if a Bounce Back Loan is not repaid?
Initially, the business itself is responsible for repaying the Bounce Back Loan (BBL). If the business is unable to make the required repayments, the lender can pursue standard debt collection methods.
These methods can include taking legal action in the County Court to obtain a judgment, followed by further steps to enforce that judgment. More commonly, the lender will begin insolvency proceedings such as winding-up proceedings to liquidate the business if it’s a limited company, or bankruptcy proceedings if the business is a sole trader or similar entity.
In our experience, the most frequent situation is where the company enters a Creditor Voluntary Liquidation (CVL), meaning the company has recognised it is insolvent and has agreed to appoint a liquidator to dissolve the company.
For a limited company, after liquidation, if the BBL is not repaid or only partially repaid, the remaining balance is written off once the company is officially liquidated.
However, the liquidator has the option to pursue a claim against a former director to recover the unpaid amount if the liquidator believes the director acted improperly when obtaining or managing the loan. This is known as “misfeasance claims” or claims pursuant to Section 212 of the Insolvency Act 1986. The Secretary of State can also seek to recover the unpaid loan by pursuing a director disqualification compensation order.
Can I be personally liable for repaying the Bounce Back Loan if my company is in liquidation?
While directors of limited companies are generally protected from personal liability for company debts, they may still be held personally accountable for the BBL if it was misused or obtained through false information. Examples of this include:
- Overstating the business turnover in the original BBL application or in a subsequent “top-up” application to receive the maximum available loan.
- Misusing the funds. The BBL was intended to be used for the “economic benefit of the business” to support day-to-day operations. If the loan was used for personal purposes, this would be considered a misuse of the funds and a violation of the rules of the scheme.
- Diverting the funds elsewhere, such as to another company or third party. If it cannot be shown that the funds were used for the benefit of the business, giving the money away could be considered a misuse of the loan.
What might happen?
Action by the liquidator
If there is evidence that the BBL was misused or obtained through false information, the liquidator may take action against the director, seeking an order for the director to personally repay the funds. The use of the loan will need to be examined in detail to assess any potential counter-arguments, as these cases are very fact-specific.
Action by the Secretary of State
The Secretary of State can start director disqualification proceedings if there is evidence that the BBL was improperly obtained or misapplied. The Secretary of State can seek a disqualification order, preventing the individual from acting as a director for a period of 2 to 15 years. Since the COVID-19 pandemic, the Secretary of State can also pursue a compensation order or undertake criminal proceedings, requiring the director to personally repay the BBL.
What if I don’t believe I misused the Bounce Back Loan but am being held personally liable for much more than the BBL debt?
It is possible that the company’s financial records show an overdrawn director’s loan account or other improper use of company funds or assets. As a result, the liquidator may pursue the director for “misfeasance” under Section 212 of the Insolvency Act 1986.
This is a separate issue from the BBL, but it is often the case that the BBL liability contributed to the company’s insolvency, leading the liquidator to investigate the director’s loan account and potentially pursue misfeasance claims.
Our specialist Insolvency team have extensive experience assisting directors faced with allegations of misfeasance and director disqualification proceedings, not just arising from Bounce Back Loans. For more information, feel free to email me or my colleague Bimal Kotecha. You can also contact us via our website here.