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What are the Consequences for Businesses Unable to Repay Government Loans?

The UK government has implemented various supportive measures to combat the economic impact of the COVID-19 pandemic, and among them is the Bounce Back Loan Scheme (BBLS). This initiative has been instrumental in enabling businesses across the country to survive the financial challenges posed by the pandemic.

As the first tranche of loan repayments is due in the spring of 2020, it raises the question of what will happen if a borrower is unable to repay. Therefore, it is essential to understand the key features of the scheme before exploring the potential consequences for directors who are unable to repay a Bounce Back Loan.

Understanding the Mechanics of the Bounce Back Loan Scheme

The government’s full backing of the Bounce Back Loan Scheme made it an exceptional initiative. The scheme was designed to provide a 100% guarantee to encourage lending, and to support businesses that were severely affected by the national lockdown and ongoing local restrictions.

Under the scheme, businesses are not required to make any repayments for a period of 12 months from the start of the loan. In addition, the government covers the loan interest and charges during this period. The fixed interest rate of 2.5%, which is applicable for up to six years, has also been beneficial in allowing small and medium-sized enterprises (SMEs) to manage the situation more effectively, potentially preventing their closure.

However, with the ongoing disruption caused by the COVID-19 pandemic, many businesses are still struggling to survive. As such, it’s essential to understand the potential liabilities for company directors in case a business is unable to repay a Bounce Back Loan.

Director Liability for Non-Payment of Bounce Back Loans: What You Need to Know

Incorporated businesses have a distinct legal identity from their director(s), which typically implies that directors cannot be held liable for company debts. Moreover, Bounce Back Loans are unsecured and do not require personal guarantees from directors.

Thus, if the business is unable to continue and must enter into Creditors’ Voluntary Liquidation, you and other directors would not be accountable for the outstanding loan amount.

However, the situation may alter if the company is liquidated, and you, as a director, have failed to fulfil your statutory responsibilities. This may include misallocating funds, fraudulently obtaining borrowing through providing false information, or neglecting to prioritise creditors’ interests in insolvency.

The legal distinction between a company and its directors is often referred to as the ‘veil of incorporation.’ However, this veil can be lifted in specific cases, such as where there is an increase in creditors’ losses, or when wrongful or fraudulent activities are discovered.

The Ramifications of Personal Liability for Bounce Back Loans

The liquidator’s investigations can extend back several years, and if there is evidence of misconduct or misfeasance leading to the company’s downfall, the office-holder can reverse any transactions as required or recover any funds that have been misappropriated.

As a director, you may face disqualification from your position for a period of 2 to 15 years. You may also be personally accountable for the outstanding Bounce Back Loan balance, as well as other company debts.

The liquidator has the authority to pursue legal action against you, which could put your personal assets, including your home, at risk. Therefore, if you are concerned that you may be held responsible for the repayment of a Bounce Back Loan or other company debts, it’s crucial to take appropriate steps to mitigate these risks.

Seeking legal advice from a professional insolvency practitioner or lawyer is a good starting point. They can provide guidance on your legal obligations and potential liabilities, as well as advise you on appropriate measures to protect your personal assets.

The Importance of Seeking Professional Advice on Bounce Back Loans

can offer impartial and dependable advice. It’s vital to understand that voluntarily placing your company into liquidation when there is no hope for business recovery is preferable to waiting for a creditor to force it into liquidation.

By opting for voluntary liquidation, you are prioritising your creditors and adhering to UK insolvency regulations, which can safeguard you from future allegations. Our team, led by our partners, can provide custom-made guidance if your company is unable to repay a Bounce Back Loan. Please contact us to schedule a free consultation on the same day. We have an extensive network of offices located throughout the country.

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