What is a Bounce Back Loan?

There is no dispute that the COVID-19 pandemic had a devastating, and in many cases fatal, impact on businesses of all sizes.

In 2020, the Government responded to the situation and introduced Bounce Bank Loans under the eponymous scheme to support struggling companies. The scheme allowed small- and medium-sized businesses to apply to borrow between £2,000 and £50,000 (or up to 25% of the borrower’s turnover) at a low-interest rate guaranteed by the Government. These loans were made on the strict condition (amongst others) that the sum borrowed was not to be used for personal purposes.

While the terms and options for repayment differed between lenders, instalments for repayments of the sum borrowed were to begin 12 months after receipt of the loan. Full repayment was to be realised over 6 years or, if under the Pay As You Grow repayment agreement, 10 years.

The introduction of the scheme saw over a million applications approved by July 2020, and by July 2022 businesses had drawn a total of £46.6 billion. The first evaluation of the scheme, published in June 2022, found that without the scheme as  many as 500,000 businesses might have permanently ceased trading during 2020.

Misuse of the Bounce Back Loan Scheme

While the scheme was fundamental to the survival of many businesses, case studies show it was also exploited by some. One government press release announced that the Insolvency Service had discovered two companies which had submitted false documents to 41 local authorities, each securing a £50,000 Bounce Back Loan plus a combined £130,000 in other grants. The Insolvency Service’s investigations ultimately resulted in the companies being wound up in July 2021 when it was discovered that the companies had never even traded.

Under the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, which is currently before Parliament, it is understood that the Insolvency Service will soon be granted additional powers to investigate Bounce Back Loan fraud where the company has since been dissolved.

As a result, it is foreseeable that further misuse of Bounce Back Loans will come to light putting those companies at risk of being investigated.

Who is liable?

Directors are likely concerned that they may be held personally liable for the repayment of the loan. However, one of the most appealing features of the Bounce Back Loan scheme was the lack of requirement for company directors to provide a personal guarantee. This offered these individuals peace of mind that they would not be held liable for repayment of the loan should their company enter into an insolvency process. Nevertheless, there are circumstances where directors can be found liable for the repayment of this loan.

When companies enter into formal insolvency procedures directors who, intentionally or otherwise, did not use the loans to “provide economic benefit to the business” were (and still are) at risk of becoming personally liable.

As officers of the company, directors are bound by a duty to promote the success of the company, which includes “to consider or act in the interests of creditors of the company” under section 172(3) of the Companies Act 2006. Fundamentally, this means that no one creditor may be favoured over others, as doing so can be seen as creating a preference. With a company at risk of becoming insolvent, and likely having several outstanding liabilities it is not hard to envisage situations where directors utilise the Bounce Back Loan to repay debts where the directors have given a personal guarantee and/or paid outstanding debts to connected parties (i.e., a spouse, civil partner, or relative).

When entering insolvency procedures the administrator or liquidator is bound under statute to act in the best interest of the creditors. If, during their investigations, they discover the Bounce Back Loan was not used in accordance with the terms for which it was made, or if there was a preferential payment (as referenced above), the responsibility to repay the loan falls to the company directors personally. If the sum owed cannot be repaid, their personal assets will also be at risk, and in some scenarios, they can be made bankrupt.

How we can help

Working with insolvency practitioners during their investigations into the conduct of directors of insolvent companies can achieve positive results for creditors who without expert legal advice and cost-efficient intervention are otherwise at risk of losing significant amounts of money.

Remember, if you, or someone you know, considers that a director has utilised a Bounce Back Loan for their own gain or more importantly not for the economic benefit of the company, there is a risk that the creditors of this company will be financially disadvantaged by the director’s conduct.

Griffin Law is a dispute resolution firm comprising innovative, proactive, tenacious and commercially-minded lawyers. We pride ourselves on our close client relationships, which are uniquely enhanced by our transparent fee guarantee and a commitment to share the risks of litigation.  For more details of our services please email justice@griffin.law or call 01732 52 59 23.


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