At the start of the COVID-19 pandemic in 2020, businesses in sectors such as leisure, travel and hospitality were hit especially hard by government regulations put in place to curb the spread of the virus. Overnight, businesses were required to immediately cease trading or at least drastically change the way they operate. In order to help companies ‘bounce back’ from these difficult times, the Government introduced bounce back loans.
What are bounce back loans?
The bounce back loan scheme was introduced to help small and medium sized businesses to borrow between £2,000 and 25% of their turnover (up to a maximum of £50,000). This loan was guaranteed by the government to be interest free for twelve months, after which, the interest rate was introduced at 2.5% per annum. For businesses who asked for loans of below the maximum amount they were entitled to, it was possible for them to request for this amount to be topped up if needed.
The bounce back loan scheme (along with all top up requests), ceased on the 31st March 2021, however, whilst it was introduced to aid businesses, it has grown to be obvious that many bounce back loans have been misused and whilst the scheme has finished, the government is pursuing offenders.
Misuse of bounce back loans
There are a range of ways that the scheme has been misused, including:
Salary related abuses
Whilst company directors were allowed to use an element of their loan to draw a salary, under law, this salary must not have been larger than was previously taken before the pandemic. Salary abuses were one of the most common misuses of bounce back loans.
Personal and family use
Whilst bounce back loans were meant specifically for business use, another common abuse of the scheme has been for directors to purchase items for their own personal use, for example, home improvements, or purchasing a new vehicle. In this cases, the director would be liable to repay the amount taken for these purchases in full.
As well as personal use, another misuse of loans has been to repay loans for family members. Should a business fail following this use of a bounce back loan, this may be determined to be a preferential payment and therefore be overturned by the court, leaving the director liable to repay the amount taken from the company loan.
Dividends abuse
As a dividend is a payment made to company shareholders when it has made a profit, these payments should only be taken from the distributable reserves of the business, and not the government loan. Any payment of dividends via a bounce back loan is illegal and company directors would therefore be liable.
Company Liability
Directors are liable for any misuse of bounce back loans. As these loans were specified for the economic benefit of businesses following the COVID-19 restrictions placed on them by the government, these funds should have been used to invest in the future of the company and to pay creditors any debts owed.
Fraudulent company directors who are found guilty of misusing bounce back loans and are not able to repay what they took in full, are at a high risk of being reported to the Insolvency Service. The results of this will not only mean a personal liability, which could potentially result in bankruptcy, but also carries a criminal record.
For directors who took out bounce back loans and used the funds legally but found that they were insufficient to meet all company liabilities in full, professional, independent advice can be sought from licensed insolvency practitioners. An insolvency practitioner will ascertain whether the company is viable going forward, as well as ensuring that directors are not committing fraud by making payments for any liabilities.
For help and information on company liability for use of bounce back loans, contact BEACON LIP.