During the COVID-19 pandemic, the UK government, in partnership with lenders, introduced the Bounce Back Loan (BBL) Scheme. The scheme provided a crucial lifeline for hundreds of thousands of businesses whose activities were disrupted by the pandemic. However, in the post-pandemic period, the government and lending institutions are reviewing BBLs with greater scrutiny. As a result, some company directors face aggressive recovery actions and serious questions about their conduct.
This article explains the most common grounds for Bounce Back Loan disputes and outlines the risks directors face if they are found to have been ineligible for a loan under the scheme or to have misused funds from a BBL.
Why are bounce-back loans being disputed?
Most disputes involving COVID-era bounce-back loans are triggered when the lender (or, in some cases, an insolvency practitioner) reviews a company’s business affairs and finds reason to doubt that the company was eligible to take out the loan or that the funds were properly used. The three most common scenarios are:
Queries around eligibility
The application process for bounce-back loans allowed businesses to self-certify in order to distribute much-needed funds as quickly as possible. But now, lenders and authorities are reviewing those applications to verify if businesses truly met the criteria. Disputes have been triggered due to:
- Overstating turnover: Businesses could borrow up to 25% of their 2019 turnover, capped at £50,000. Inflating this figure to secure a larger loan is a primary trigger for investigation.
- Misrepresenting a business as active when it was not: Applications from dormant companies or those that had already ceased trading are being flagged as fraudulent.
- Taking out multiple bounce-back loans: Each business was only entitled to one BBL, so businesses that took out more than one loan may face investigation.
Alleged misuse of funds
A core condition of the scheme was that the funds must be used for the "economic benefit of the business." While this was a broad term, it was not intended to be a blank cheque for personal spending. Allegations of misfeasance have arisen in cases where directors used all or part of the BBL to pay off personal debts or mortgages, make personal purchases such as cars or holidays, or transfer funds to a personal account without a clear justification.
Non-payment and default
Although the government guaranteed bounce-back loans for lenders, this does not absolve the businesses taking those loans of their duty to repay. As some businesses struggle to make repayments, they face demands from the bank, which quickly escalate to involve debt collection agencies. But on top of this, defaulting on a BBL is a common trigger for investigators to take a closer look into the company's affairs, potentially revealing issues of eligibility or fund misuse as we’ve discussed above.
What are the potential consequences for directors?
Although BBLs did not require a personal guarantee, directors are not entirely shielded from personal liability if misconduct has occurred. And the consequences can be severe:
- Director disqualification: If a director is found to have knowingly taken a BBL their company was ineligible to receive, or misused funds received via a BBL, they can face disqualification from acting as a company director for up to 15 years.
- Personal Liability Notice (PLN): If a director is found guilty of improper use of company funds or other misfeasance, then a court can issue a PLN. This essentially makes the director personally liable for the company’s debts, which may include repaying the BBL.
- Insolvency proceedings: If there is persistent non-payment of the BBL debt, the bank may issue a winding-up petition against the company, forcing it into compulsory liquidation.
Are you involved in a bounce-back loan dispute?
If you’re a company director and you’ve received a letter of demand relating to a BBL, are facing questions from an insolvency practitioner, or simply have concerns about a current or potential investigation, don’t wait to take action. Gather all the relevant documentation you have available: the original loan application, your company accounts and bank statements showing how funds were spent, and then seek legal advice.
At Complex Law, we specialise in disputes pertaining to the UK’s bounce-back loan scheme, and we’ll be able to give you a clear understanding of your legal position and the options available to move forward. Early, expert guidance can make all the difference in these cases, so get in touch with us today to plan your next move, or learn more about bounce-back loans with our Complex Academy.
Frequently asked questions
I am a sole trader, not a company director. How do these disputes affect me?
Unlike a limited company, a sole trader does not have a separate legal personality. This means you are personally liable for the loan by default. The absence of a personal guarantee in the BBL terms does not change this fact. If your business cannot repay the loan, the lender can pursue your personal assets to recover the debt.
What happens if I dissolve or strike off my company after receiving the BBL?
Dissolving a company without informing creditors, including the BBL lender, is a serious issue. The Insolvency Service has the power to have the company restored to the official register. Once restored, it can be placed into liquidation, and your conduct as a director will be investigated, potentially leading to disqualification and a personal liability order for the BBL funds.
My company is struggling to make repayments. Are there any options besides defaulting?
Yes. The government introduced the "Pay As You Grow" scheme, which – depending on circumstances – may allow your business to extend the loan term to up to 10 years in total, as well as offering options for temporary payment holidays or interest-only payments. For more information, contact your lender directly and mention the scheme.
Can I go to prison over a Bounce Back Loan?
For the vast majority of company directors facing bounce-back loan disputes relating to loan eligibility or fund use, the consequences are civil – director disqualification or personal liability orders. However, in serious cases involving deliberate fraud and dishonesty, criminal proceedings can be initiated. Whatever your situation, the sooner you seek qualified legal advice, the better.
My bank has claimed on the government guarantee. Does that mean I am no longer responsible for the debt?
Unfortunately not. If your lender has had to resort to claiming on the government guarantee, then the loan is not written off; the debt simply transfers to the government. They will then continue to pursue your company for the outstanding amount. This may also trigger further scrutiny by the Insolvency Service into the reasons behind the default.
This blog is for general information purposes only and does not constitute legal advice. For advice specific to your circumstances, please contact our team directly.
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