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It’s payback time – When a Bounce Back Loan becomes a personal liability

The UK Government’s Bounce Back Loan Scheme was launched on 4 May 2020 and offered COVID-19 related business support to SMEs. Loans of up to £50,000 (or a maximum of 25% of annual turnover) were provided directly to businesses by commercial lenders. The scheme closed on 31 March 2021, with loans over £47 billion in value having been paid out.

In the first year of the loan scheme, no capital repayments were due and the Government paid the interest. At the date of writing this blog, most borrowers will now be facing loan repayments. At least £1.3 billion in repayments has already been defaulted on.

Can loan recipients be held personally liable for repayments?

Company directors facing default on loan repayments may be concerned that they could be held personally liable. The Bounce Back Loan is a business loan, so company directors should not normally be personally liable for making repayments. However, there are some circumstances in which there could be personal liability for Bounce Back Loans:

The loan recipient applied for and received a Bounce Back Loan despite being ineligible;

 The eligibility criteria for the Bounce Back Loan were:

  1. That you were running an active UK trading company;
  2. At least 50% of the company’s income was from trading;
  3. The loan was for the economic benefit of the business and not taken out for personal reasons.

If a director applied for and obtained a Bounce Back Loan despite not meeting the eligibility criteria, there may be a risk of being held personally liable for repayments. This is a particular risk if the director misled the lender knowingly, as this could be considered fraud. This could also be a breach of fiduciary duty which could result in personal liability to the company for paying back the loan.

You used the Bounce Back Loan for an improper purpose

If a director used a Bounce Back Loan for some other purpose than for the economic benefit of the business, they may have breached the terms of the loan and could be found personally liable for repayments. Examples of improper use of the funds could include using the money for a different company than the one the loan was taken out for; a director paying themselves a large dividend or bonus, or using the loan to repay their director’s loan.

This could become a particular issue if the company ends up becoming insolvent and goes into liquidation. If a director used a Bounce Back Loan to pay one creditor of the company and not another creditor (known as an unfair preference), then the Liquidator could hold the director personally liable to return that money to the company. Or if the company is insolvent and the director is unable to pay back the Bounce Back Loan; the director could be at risk of wrongful trading (knowingly trading whilst insolvent). Wrongful trading is an offence under section 124 of the Insolvency Act 1986.

If you took out a Bounce Back Loan and are concerned about personal liability, contact our Dispute Resolution team at 0131 226 8200 or online.

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