The Government’s Bounce Back Loan Scheme was introduced at the height of the coronavirus pandemic.

Borrowing up to £50,000 with no fees or interest to pay for the first 12 months was a lifeline for many businesses that were seriously affected by the pandemic.

This was obviously an uncertain time for most company directors, so to reassure nerves, the government guaranteed 100% of the loans.

For directors, the main advantage of the Bounce Back Loan scheme was that the government-approved lenders were not allowed to ask for personal guarantees. But – and it is a big but – there are some circumstances in which directors can be held liable for the loan if the company can’t make repayments.

What was the loan for

To determine personal liability, we need to examine what Bounce Back Loans were actually for.

Bounce Back Loans were a very low-cost form of finance, so if a business needed money then it was a great option to take.

For companies that were adversely affected by the pandemic, the loans could be used for all sorts of business purposes, including paying staff, investing in equipment and buying stock. It can also have been used to pay a director’s salary if the company was viable before the pandemic.

What is an ‘undertaking in difficulty?’

When applying for a Bounce Back Loan, company directors needed to declare that their business was not an undertaking in difficulty.

This is a legally defined stat that is quite confusing if you’re not a lawyer or an accountant. EU state aid rules say that an undertaking in difficulty is one that

•             Accumulated losses greater than half of their subscribed share capital (for limited liability companies)

•             Entered collective insolvency proceedings or fulfilled the criteria to be put into insolvency

•             Previously received rescue aid that was not yet reimbursed

•             Was under a restructuring plan

If your company met any of these criteria, you should not have applied for a Bounce Back Loan.

Making creditor preferences

All businesses at risk of becoming insolvency must act in their creditors best interests and cannot favour certain creditors over others. If a Bounce Back Loan is used to ‘preference’ one debt over another, then the director may be personally liable.

This could include situations where:

•             Loans are used to pay debts on which the director is personally liable, while unsecured creditors are not paid

•             Loans are used to pay family members and not other creditors

•             Tax liabilities are ignored

Misusing loan funds

When signing up to the Bounce Back Loan scheme, directors would have signed a range of terms and conditions. The loan funds must have been used in line with these terms. If they weren’t, then the director could be held personally liable.

If, for example, you took a loan out of the company and used it to pay off personal debts, this would be fraudulent and a liquidator might determine that the director is personally liable for debts.

Need help with a company insolvency? Speak to a member of the Umbrella.UK Insolvency team today. Call: 0800 611 8888.