Personal liability for Covid loans

As Government-backed financial support schemes draw to a close this autumn, it appears inevitable that many businesses will be unable to continue trading and will ultimately enter some form of insolvency process.  It is anticipated that creditors of those businesses will include outstanding “Covid” loans.

Bounce Back Loans (“BBL”) appealed to many small businesses as, where the BBL was taken by a corporate entity such as a limited company, there was no requirement for repayment to be backed by a personal guarantee (“PG”) as the Government guaranteed 100% of the loan. In contrast, only 80% of sums borrowed by way of a Coronavirus Business Interruption Loan (“CBIL”) were guaranteed by the Government, meaning that in many cases directors were required to provide a PG for the remaining 20%.

BBLs and CBILs (together “Covid Loans”) were made available for paying staff wages, business rates/rent and other regular overheads.  They could also be used in certain circumstances to refinance other business debts so as to reduce interest costs.  If the loan has been sensibly used for its proper purpose, then there should be no realistic prospect of any additional personal liability for directors.  Sole traders do not of course benefit from a legal separation between personal and business finances so liability for business debts, including BBLs or CBILs, rests entirely with the individual.

If a corporate entity enters into a formal insolvency procedure, the office holder will investigate the conduct of the directors during the period leading up to the insolvency.  If their investigations reveal that Covid Loans were not used in accordance with the terms of the loan agreement, then, in certain circumstances, directors could be made personally liable for repayment of the loan.  Covid Loans may not, for example, be used to pay dividends, to pay off a loan which had been personally guaranteed by the director, to place into a personal savings account to accrue interest or for any type of personal expenditure (we have all heard anecdotal stories of directors treating themselves or paying off credit card debt).

BBLs must be demonstrably used “to provide an economic benefit to the business”.  If the director has misapplied the funds, whether from the BBLs or one of the other Government support schemes, they could face personal liability for the sums misapplied.

Office Holders, HMRC and the Insolvency Service will be looking closely at failed companies where Covid Loans have not been repaid.  Directors may face one or more of the following:

  • financial recovery proceedings brought by the liquidator and/or HMRC for misuse of Covid Loans and/or monies from other Government support schemes;
  • director disqualification proceedings under Section 6 of the Company Directors Disqualification Act 1986;
  • criminal proceedings arising from police, HMRC or Insolvency Service investigations in respect of the alleged misuse of funds.

If a company cannot repay a Covid Loan, the declarations made by the director(s) at the application stage will be reviewed.  They will have had to make a declaration that prior to 2020, the company was financially sound.  If it transpires that they made a false declaration or misused the funds in any way, they are likely to face personal liability for the loan and/or face prosecution as outlined above.

In order to protect themselves as far as possible against any allegation of misuse of company funds, directors would be well advised prior to contemplating a formal insolvency process to review their Covid Loan applications; record in writing the full circumstances in which the loans/grants were taken; why they were taken; how the funds were applied, (including if necessary written statements from the individuals involved in the application process); and the reasons why it now transpires that the company can no longer continue to trade (ie what has changed) .  Contemporaneous documentation (meeting notes, correspondence etc.) created at the time will be particularly important, including documents which evidence the financial position of the company, as these will be relevant to declarations made as to the company’s solvency prior to taking out the loan.

It is important to seek early professional advice regarding any outstanding Covid Loans prior to placing the company into liquidation.

John Bradshaw is a partner and specialist in Insolvency & Business Recovery at Barker Gotelee Solicitors.

Suffolk Insolvency Solicitors – for more information on our range of legal services, please call the team on 01473 611211 or email