The Recovery Loan Scheme and directors’ personal liability

26 April 2021 / Insight posted in Articles

On the 6 April 2021, the new Recovery Loan Scheme was opened for applications from businesses. It is a direct replacement for Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) which closed for new applications at the end of March 2021.

The Recovery Loan Scheme aims to support smaller businesses with additional finance to manage cash flow, growth and investment as they steer a path towards a sustainable recovery.

How much can a business borrow through the Recovery Loan Scheme?

The maximum amount provided under the scheme is £10 million per business and £30 million per group. Two main types of borrowing can be secured using the Recovery Loan Scheme with both traditional bank lending, such as loans and overdrafts being available, as well as asset-based finance options, subject to the lender being accredited.

The timeframes provided are:

  • up to three years for overdrafts and invoice finance facilities
  • up to six years for loans and asset finance facilities.

No personal guarantees will be taken on facilities up to £250,000, and a borrower’s principal private residence cannot be taken as security. The government will provide 80% security to lenders, in the hope that it encourages lending to the market.

Interest and fees will be paid by the business from the outset and the annual effective rate of interest and upfront and other fees cannot be more than 14.99%.


The Recovery Loan Scheme has been created to be available to a greater number of businesses and have fewer restrictions than the previous government-backed CBILS and BBLS loans. A business can apply for a loan if it is based in the UK and is not a bank, building society, insurer, reinsurer (but not insurance brokers), public sector body or state-funded primary and secondary school.

The business must be viable, or would be viable were it not for the pandemic, and it must have been adversely impacted by the pandemic in some way. The company must not be in collective insolvency proceedings when applying through the Recovery Loan Scheme.

Can the Recovery Loan Scheme be used if a business already has CBILS or BBLS loans?

Businesses that have taken out a CBILS or BBLS facility can access the new scheme, although the amount that they have borrowed under a previous scheme may in certain circumstances limit the amount that they may borrow under the Recovery Loan Scheme.

All these products are ultimately loans and need to be paid back so the business must be certain it is able to do so when the loan becomes repayable. The directors should carefully consider the rationale for taking further borrowing and document their decision-making.

What happens if the company cannot repay a recovery loan?

The government has advised lenders to follow their usual protocols for chasing and enforcing loan defaults, but the true extent of their recovery processes and attitudes to these debts (CBILS and BBLS) has yet to be fully seen. The new Recovery Loan Scheme does not have director personal guarantees, so the directors would not be personally liable if the loans are defaulted and the company is placed into some form of insolvency process. However, directors should be mindful that other debts crystallise upon insolvency and other loans obtained with personal guarantees would become payable.

Are directors personally liable for recovery loans during an insolvency process?

While the directors are not directly personally liable for the recovery loans, they should be mindful of their fiduciary duties as directors. If a company is placed into an insolvency process (administration or liquidation), there are scenarios where personal liability may arise.

Firstly, the Recovery Loan Scheme funds should be used for the purpose of the business. The purpose of the loan should be sufficiently documented and used as it was intended. If there are changes, these should be recorded by the directors. As part of an administrator or liquidator’s role, they will investigate the reasons for the company’s insolvency, including how loans were used. If they find the loan has not been used in accordance with the terms, this could be deemed misfeasance under the Insolvency Act, and the directors could be made personally liable for the repayment of the loan.

Secondly, if recovery loans are taken and used to pay back certain creditors and not others, especially those where director personal guarantees are held, directors should be extremely cautious if the company is placed into an insolvency process. These payments could be known as preference payments in accordance with the Insolvency Act and would be requested to be paid back by the appointed administrator or liquidator thus making the directors personally liable.

Officeholders (administrators or liquidators) will look at the directors’ conduct and report on this to the Insolvency Service as part of their statutory duties. If it is deemed that there has been ‘unfit conduct’, the Insolvency Service may seek a disqualification order of a period between two to 15 years.

Further advice

Whether you are suffering cash flow problems, are considering obtaining further funding or are unsure whether your business is still viable, the Insolvency Practitioners at Moore Kingston Smith Licensed Insolvency Practitioners can help advise you on your best course of action.