Personal liability – Warning for company directors over ‘bounce back’ loans

Small firms have borrowed more than £14bn under the scheme since it was launched on 4 May 2020.

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Businesses can borrow up to 25% of their turnover up to a maximum of £50,000. The loans are interest free for the first twelve months and are underwritten by the UK Government.

Company directors don’t need to provide a personal guarantee and the loans should be used to help firms to survive. However, some company directors have considered using the scheme to repay themselves or personal debts.

There is a false assumption that if the company is unable to recover from the impact of Covid-19 and subsequently enters into a formal insolvency process, then responsibility for repaying the loan will remain solely with the company and liability would not be transferred to directors.

However, this will not be the case if directors have acted improperly and breached their fiduciary duties or abused the loan scheme. While wrongful trading provisions have been temporarily suspended in response to the Covid-19 outbreak, other provisions of the Insolvency Act and Companies Act remain in full force and operation.

Directors need to be mindful of potential misconduct and the issue of ‘preference payments’. Bounce back loans can be used to refinance existing liabilities, but great caution needs to be exercised.

A typical scenario is where company debt includes some that is personally guaranteed or personally owed to directors or their associates. If a director chooses to only repay pay debts with a personal link, leaving unsecured creditors unpaid, this would be an act of misfeasance through the making of a preference. An appointed licenced insolvency practitioner would challenge this and it could lead to personal liability for repayment.

If company directors intend to use bounce back loans to repay existing debt, they should remove the risk of inadvertently falling foul of the rules surrounding preference payments. Getting professional advice now adds a layer of protection in the unfortunate event the company subsequently becomes insolvent.

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