Understanding Bounce Back Loan misuse and fraud if I liquidate in Scotland

If your company took out a Bounce Back Loan and you’re now thinking about closing the business down due to insolvency, you may be worried about where that leaves you as a director. A common concern of the directors we speak to in this position is whether they could be held personally liable for the amount remaining on the Bounce Back Loan.

The short answer is that for the vast majority of directors, taking out a Bounce Back Loan and later liquidating the company will not make them liable for the outstanding balance.

There are, however, a couple of exceptions to this rule that directors need to be aware of when considering liquidation with an active Bounce Back Loan. This guide will explain what they are, and what directors should do if they find themselves unable to pay their Bounce Back Loan.

The Bounce Back Loan Scheme (BBLS) was set up by the government in May 2020 to support businesses through the pandemic. Companies could borrow up to £50,000, with the loan 100% guaranteed to the lender by the government. The scheme closed to new applications on 31/03/2021.

Bounce Back Loans had two important features, both of which becomes particularly important should a company later become insolvent:

• There was no personal guarantee. Unlike many business loans, directors did not need to provide a personal guarantee for a Bounce Back Loan. Instead, this security was provided by the government.
• The funds had to be used for the economic benefit of the business. While there was not an exhaustive list for what Bounce Back Loan funds could and could not be used for, it was clearly stated that the money should be used for the economic purposes of the business and not for personal spending. Misuse of the Bounce Back Loan funds can come with extremely serious consequences should the company later enter into formal insolvency proceedings.

As there are not routine checks into how companies used their Bounce Back Loans, instances of misuse of funds typically happen when that company enters into formal insolvency proceedings, such as a Creditors’ Voluntary Liquidation (CVL).

As part of the liquidation process, the appointed insolvency practitioner has a legal duty to investigate how the company was run and how its money was used. With Bounce Back Loans, there are a number of potential issues that can cause difficulty. These include:

• The company wasn’t eligible for the Bounce Back Loan. For example, if the company wasn’t trading on 01/03/2020, or wasn’t actually carrying on business.
• Turnover was overstated in order to obtain a larger loan. The £50,000 cap was based on 25% of turnover. Inflating that figure to obtain more money is the kind of thing that can be viewed as misuse.
• The money was used for personal benefit. Drawing the funds out for personal use (rather than for the business) can create an overdrawn director’s loan account that the liquidator will seek to recover from you personally.
• Obtaining multiple Bounce Back Loans. Taking more than one loan for the same business was not permitted.
• Preferential payments were made. This means using the Bounce Back Loan funds to repay yourself, a family member or a connected company ahead of other creditors with the intention of putting them in a better financial position.

The key distinction when it comes to potential Bounce Back Loan misuse or fraud comes down to honest business use that didn’t work out and deliberate misuse for personal benefit.

When a company is liquidated, the licensed insolvency practitioner appointed will:

• Review the company’s bank statements and accounts to see how the loan was spent
• Check that the company was eligible and that the amount borrowed matched its turnover
• Look for any money owed back to the company by directors (an overdrawn director’s loan account)
• Submit a confidential report on the conduct of the directors to the Insolvency Service. It should be noted here that this is a routine, legal requirement in every liquidation and not a sign that anything is wrong

In genuine cases of dishonesty, directors can face recovery action, director disqualification under the Company Directors Disqualification Act 1986, or in rare and serious cases, criminal investigation.

Director disqualification and compensation orders are extremely rare. As long as you used the Bounce Back Loans to help sustain your company, you will not be punished for later closing the company.

When it comes to Bounce Back Loans and how they are treated during insolvency, the principles above remain no matter where in the UK you are based. The liquidation process your company may go through, however, does differ slightly if your company is registered in Scotland.

A Creditors’ Voluntary Liquidation (CVL), the most common type of liquidation, follows broadly the same process wherever you are in the UK. Where your company is forced into liquidation via the courts, however, the winding up petition is heard in the Court of Session or the relevant sheriff court, rather than in an English court.

If a creditor (including HMRC) is pressing for payment, the route they use to place your company into compulsory liquidation will also run through the Scottish courts. Taking advice from an insolvency practitioner who works in Scotland day to day, and understands these differences, ensures your company’s situation is handled correctly from the start.

• The act of taking a Bounce Back Loan and later liquidating the company is not fraud in itself
• There was no personal guarantee on Bounce Back Loans, so the debt belongs to the company, not yourself as an individual.
• Issues with unpaid Bounce Back Loans only arise in specific situations such as fraudulently obtaining the loan in the first place, and using the funds for personal use rather than to benefit the business.
• Keeping records and taking advice early are the best ways to protect yourself.

If your company has an outstanding Bounce Back Loan and you’re worried about what liquidation could mean, we’re here to help. As licensed insolvency practitioners working across Scotland, we’ll explain your position clearly and help you understand your options.