Personal Liability for Bounce Back Loans: Know Your Obligations And How To Manage Risk!

Bounce Back Loans were a vital financial aid during challenging times, but for directors, a potential headache is personal liability. While the government guarantees repayment, directors can be held personal liability for Bounce Bank in specific situations.

This raises concerns about the potential consequences, which can be both financial and professional. To navigate these risks effectively, as a director you need to understand the situations that trigger liability and then implement prevention strategies to mitigate that! 

Don’t worry! This guide will explore the key scenarios where directors might be held personally liable for a Bounce Back Loan, along with practical tips to minimise the risk and ensure responsible use of the loan. 

What Is A Bounce Back Loan?

A Bounce Back Loan is a type of financial assistance offered by the government to help small businesses in the UK during times of economic difficulties, such as the COVID-19 pandemic. 

Chancellor Rishi Sunak introduced the Bounce Back Loan scheme, offering businesses a lifeline amid COVID-19 and to provide up to £50,000 in finance for those facing revenue loss and disrupted cash flow.

Under the Bounce Back Loan Scheme, lenders offered loans ranging from £2,000 to 25% of business turnover, with a maximum of £50,000, repayable over 6 years. 

While the government guaranteed the loan balance, businesses retained full liability for repayment. 

However, the scheme aimed to swiftly provide capital to businesses for essential purposes such as staff wages, equipment, stock, and refinancing loans. But unfortunately, some business owners have misused the loan due to its flexible terms.

Who is liable for a Bounce Back Loan?

The primary party liable for a Bounce Back Loan is the company that took out the loan, not the individual owners or directors. 

This is because the loan scheme was designed to offer limited liability to business owners, meaning their personal assets are generally not at risk if the company cannot repay the loan.

While the government’s guarantee covers the lender’s losses if the business fails to repay, the business remains responsible for its obligations. 

In this instance, sole traders or partnerships may find themselves personally liable for the debt, as these structures lack the limited liability protection of a limited company.

Am I Personally Liable For A Bounce Back Loan?

The Bounce Back Loan Scheme, facilitated by the British Business Bank (BBB), a government-owned entity, emphasised that a Bounce Back Loan is not a personal loan.

So, you are not directly liable for a Bounce Back Loan. It could happen if you wrongly applied or misused the funds. 

However, there are situations where you might incur personal liability:

• Sole trader or partnership: These business structures do not offer limited liability protection. If you are a sole trader or partner in a business that took out a Bounce Back Loan and the business cannot repay it, you might be personally liable for the debt.
• Misuse of funds: If you, as a director, misused the loan funds for personal gain or purposes unrelated to the business, you could be held personally liable for repaying it. 
• Director misconduct: In cases where the company enters insolvency and you, as a director, have failed to fulfil your legal duties, you might be held personally liable for the loan, along with other company debts.

What will happen if you fail to pay your Bounce Back Loan?

If you fail to pay your Bounce Back Loan, several consequences may occur:

1. Debt Collection 

The lender will likely initiate debt collection procedures to recover the outstanding amount. This may involve contacting you directly, sending reminders, and possibly employing third-party debt collection agencies.

2. Legal Action

If attempts to recover the debt are unsuccessful, the lender may take legal action against you to obtain a court judgment for the outstanding amount. This could result in additional costs and legal fees.

3. Impact on Credit Score

Failing to repay your Bounce Back Loan will have a negative impact on your credit score. This can make it more challenging to obtain credit or loans in the future and may affect your ability to secure financing for personal or business purposes.

4. Liquidation

 In extreme cases, if the company cannot afford to repay and has no other options, entering liquidation might become necessary. However, directors generally have limited personal liability in this scenario.

Who will pay the bill if a Bounce Back Loan is not repaid?

If the company can’t repay the Bounce Back Loan due to liquidation or administration, the loan will be written off, and the company will cease to exist.

However, if you’ve used the loan for personal debts or made preference payments to friends or family, a liquidator could reverse these actions, potentially holding you personally liable.

When Does A Director Hold The  Liability for a Bounce Back Loan?

While Bounce Back Loans offered a lifeline to many businesses during the pandemic, directors should be aware that their personal liability isn’t entirely shielded. In specific situations, they could be held personally responsible for repaying the loan. Here’s when that might happen:

1. Preferential payments: 

It’s logical to use your Bounce Back Loan to settle company debts when possible. However, directors must exercise caution regarding creditor payment orders.

Using a BBL to repay a friend or family member who previously lent money to the business could create a preference. A liquidator can reverse this even up to 20 years later if the company is insolvent.

While this might not directly impose personal liability, it could affect friends or family if the liquidator demands repayment from them.

2. Misusing loan funds:

As a director, while you generally enjoy “limited liability” for your company’s debts, misusing Bounce Back Loan (BBL) funds holds you personally accountable. Here’s how:

• Breach of Duty: Spending BBL funds on personal things (cars, holidays) breaks your duty to the company. Courts may lift the liability shield, making you personally responsible for the misused amount.

• Potential Fraud: Using BBL funds for personal debts or lying on the application can be considered fraud. This can lead to criminal charges, imprisonment, and being banned from being a director.
• Investigation & Repayment: Even without criminal charges, misuse can be investigated. If proven, you may be forced to repay the misused amount personally and face legal action to recover it.
  

What are the consequences of personal liability for a Bounce Back Loan?

While Bounce Back Loans helped businesses during challenging times, as a director if you misuse these funds, can face significant personal consequences. 

Here’s what you need to know:

• Banned from being a director: You could face a 2-15 year disqualification from holding director positions in any company.
• Personal liability: You might be held personally responsible for both the misused loan portion and other outstanding company debts.
• Legal action and asset risk: The liquidator may pursue legal action, potentially putting your home and other personal assets at risk.
• Negative impact on reputation: Misusing the loan can severely damage your professional reputation, making it difficult to secure future business opportunities.
• Difficulty obtaining credit: Personal liability for the loan can negatively impact your credit score, making it challenging to obtain future loans or credit lines for yourself or any businesses you’re involved in.

Tips To Avoid Being Personally Liable For A Bounce Back Loan

While Bounce Back Loans helped many businesses, directors can be held personally liable if the funds are misused. Here’s how to protect yourself:

• Understand the terms: Thoroughly read and understand the loan agreement, including the use of funds and repayment conditions. 
• Use funds for legitimate business purposes: Only use the loan for eligible business expenses like payroll, rent, or operational costs. 
• Maintain proper records: Keep detailed records of how the loan is used, including invoices, receipts, and bank statements.
• Don’t prioritise personal creditors: Avoid using the loan to pay off personal debts or debts owed to friends or family before business creditors like HMRC or the bank.
• Don’t mix personal and business finances: Keep your personal and business finances separate. Avoid using the loan for personal expenses or transferring funds to personal accounts without proper justification.

By following these tips and using the loan responsibly, directors can minimise the risk of personal liability for a Bounce Back Loan.

Expert Guidance Is Just A Click Away! 

If you’re concerned about potential personal liability for Bounce Back Loan repayments and require confidential legal guidance, don’t hesitate to reach out to Vanguard Insolvency today. 

Call us at 0121 769 1915 right away. We’re here to advise you on the best course of action moving forward