The Government has provided an extensive support package for some struggling businesses known as the Bounce Back Loan Scheme (BBLC)
The Bounce back loans were introduced by the Chancellor to help small businesses access emergency funding.
The government has provided full back up of the loans and it requires no repayments for 12 months and can be repaid early without any penalty, but what IF you can not pay back the loans in the future?
Is there a personal guarantee (PG) ?
No PG exists now. To provide a level of support tocompany directors from personal liability if they are unable to repay the loan the Government made sure that lenders did not demand a PG for these loans. The repayment rests only with the Company. This is an important aspect of the loan as it avoids directors of companies putting their personal assets at risk.
Things to note in the event of any circumstances where directors can still be held liable for repayment of the loan are demonstrated below.
Directors Duties and BBLS
The government has temporarily relaxed the regulations around wrongful trading to help businesses in financial difficulty so that they can carry on operating at this time, misfeasance and preferential payment rules remain in place.
Misfeasance section 212 of the Insolvency Act 1986
The law relating to misfeasance is found at Section 212 of The Insolvency Act 1986. … Misfeasance involves misapplying, retaining, or becoming accountable for any money or other property of the company by any officer or ex-officer of the company (this includes directors and the company secretary).
It is a breach of the directors’ statutory and fiduciary duties. If proved it can place their personal assets at risk and result in disqualification as a Director under the Company Directors Disqualification Act 1986 (CDDA 1986).
The loans can legitimately be used to refinance borrowing that companies have already taken but it is something over which advice should be taken. It is important to avoid breaching statutory and fiduciary director duties.
The risk of making a preferential payment
Preferential payments could also be concern if businesses cannot afford to repay the loans. If directors use some or all of the BBL for the purpose of repaying borrowing with a personal guarantee attached, it may be viewed as a preferential payment if the company is liquidated.
Preference – section 239 of the Insolvency Act 1986
Preference‘ occurs when a particular creditor is placed in a more beneficial position, to the detriment of the remaining creditors in that group. … This too could be a preference in insolvency. Preferences include the transfer of assets in addition to cash payments.
A further issue with being unable to repay the loan is if incorrect information has been provided at any point when the official declarations were be made during the application stage. If any declarations are later found to be untrue, the terms and protections provided by the scheme may not apply.
On application, the business owner must formally declare that their business has been negatively affected by the pandemic, and that it was not experiencing financial difficulty before the end of 2019.
BBLS alternatives
There are other options to BBLS for smaller businesses, including the Coronavirus Business Interruption Loan Scheme (CBILS), and alternative funding that uses business assets to generate cash.
Bounce Back Loans have been and are clearly beneficial in many ways, providing the emergency finance so many businesses. Understanding the finer details of how these loans are operated in every circumstance is vital, however, and can help directors avoid unwittingly breaching their fiduciary duties. Always take advice around your options if you are in a tricky situation as result of having had funding from the Government.
Next Step
If you want to find out anything further about this topic then please feel free to call on 0330 236 9930, 0330 236 9938 or 07961 116321. All conversations will be in strict confidence. You can also email me vee@navigatebr.com
This article is for information and interest only. It is not a substitute for full professional advice, which will take in to account the specific and individual circumstances. Navigate Business Recovery Limited cannot accept any responsibility for any loss arising as a result of any person or organisation acting or refraining from acting on any information.
Leave a Reply