A huge amount of government support has been given to help businesses through the pandemic. As part of this, directors have been able to apply for company loans without fear of giving any personal guarantees. Focusing on Bounce Back loans, directors signed a simple application form and could borrow up to £50,000 from their bank without giving any personal guarantee. But is this really risk free?
The loan must be used for business operational activity and thus must not be used by directors for anything personal or to pay off other company debts which are subject to a personal guarantee. These debts are now needing to be repaid, along with a host of other company debt built up during the pandemic. If they can’t be repaid, a liquidator may be appointed who can bring claims against directors for misfeasance (i.e. in breach of their fiduciary duty, thus not using company funds in the interest of the company) – hence directors will become personally liable, despite not giving personal guarantees.
It’s important to get advice to mitigate the risk to directors, and before insolvency strikes.
A creditor asked Moore Kingston Smith Licensed Insolvency Practitioners to look at a small catering company which had recently been put into liquidation. It had no assets and was going to be dissolved. We stopped the dissolution and were able to show that immediately before liquidation, the company had taken out a £45,000 Bounce Back loan which had been paid out to Mr X, the director/shareholder. Claims are now being raised against the director personally to repay the company. It is likely to settle before trial so that the director can reduce his liability towards the litigation costs.
New legislation will ensure that even directors of dissolved companies will be investigated. This clamp-down will be ratcheted up over the next few years, so directors should heed these warnings. The Insolvency Service will soon have extra powers to investigate bounce back loan fraud in cases where the company has been dissolved. The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, currently before Parliament, if passed, will give the Insolvency Service powers to investigate and, if appropriate, take action to disqualify directors of companies which have fraudulently claimed bounce back loans and since been dissolved. This power will be retrospective to allow conduct that took place before the law comes into force to be investigated.
To discuss any concerns related to Bounce Back loans, please contact Ian Robert below.