When a bounce back loan can become a personal liability

Donald McNaught

Donald McNaught

Restructuring Partner

13 December 2021

In October 2021, the High Court released a decision in the case of Bronia Buchanan Associates Ltd.

The case involved an outstanding director’s loan account and the director’s efforts to protest it wasn’t due, on the grounds it was offset by what should have been salary costs.

Her argument was rejected on the basis that usually the loan account balance was extinguished by dividends declared, none of the payments went through payroll and suffered deductions, and nor was it approved by the company’s shareholders.

This is a salutary lesson for all directors when drawing down cash in the form of a director’s loan, in the belief it will never need to be repaid.

This is fine when a company continues as a going concern but comes into sharp focus if the company becomes insolvent and is unable to declare any dividends. Tax planning (usually the driver for these decisions in small companies i.e. salary versus dividend etc.) goes out the window and the loan balance is crystallised.

In a post-COVID world, these situations are likely to be more common than ever.

We have already started to see enquiries come in where Bounce Back Loans (BBLs) have been obtained and then the funds withdrawn as director’s loans.

When releasing bounce back loans, the lenders were unable to ask for personal guarantees but if the funds have been withdrawn from the company afterwards, it has then essentially become a personal obligation of the director to repay the company.

We have also started to see banks object to the striking-off of companies which have an outstanding BBL - meaning directors cannot simply ‘bury’ their company and hope no one will ever come knocking.

Our advice to directors is to be up front about it.  Engage an insolvency practitioner early and discuss repayment options. This will be driven by affordability and it is possible that a sensible compromise position can be reached if the full balance cannot be paid - helping to avoid an escalation of the recovery process which would dramatically increase costs and, worst case, result in bankruptcy proceedings.

Don’t be lured into believing any adviser that says a loan account can be ignored. That is not possible, and the likelihood is that this is simply a sales tactic and they will seek a full recovery later, claiming they weren’t in full possession of the facts at the time.

By addressing it constructively, this will also help mitigate any director conduct issues with the Insolvency Service stating that they will take a keen interest in the use of COVID loans when considering disqualification proceedings.

If you’re reading this blog and feel the concerns with loan repayments and personal liability are ringing true, please don’t worry alone. A solution can be found that will help you sleep at night. That’s where we come in. If you would like to discuss any of the areas covered in this blog our team is here for you. Please don’t hesitate to get in touch with me, donald.mcnaught@jcca.co.uk, another member of our Restructuring team, or your usual Johnston Carmichael adviser. We’re ready to help.

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