No Personal Guarantee so no worries?

How can a director have a potential personal guarantee with a bounce back or CBIL loan when they did not sign up for a PG? Debbie Cockerton explains all.

As I write this the government has just announced another four-week lockdown for England. A lot of businesses that were already struggling, may find that this lockdown will be the final nail in the coffin, or the straw that breaks the camel’s back.

One good thing is that the government has announced that they will extending the furlough scheme till March 2021, to try to help businesses out, and those that must close will be given financial support from the government.

A lot of businesses have already taken advantage of the Covid-19 Bounce Back Loan and CBIL loans, where the interest rates are very low and there is no payment for the first 12 months. There has been a lot of advertising of these loans, which do not require a personal guarantee from the directors of the company and banks have been contacting their customers to offer loans to help tide businesses over, in these very strange and difficult times.

The company may not need the monies right now, but people do not know how long this will last for and if businesses are forced to close, or cut back on hours that they can open, then cashflow is affected, even with help such as furlough from the government, as ongoing expenses still have to be paid and less monies are coming into the businesses.

Cash flow is one of the main reasons that a business runs into financial difficulties as the company cannot pay staff, rent, rates and suppliers and the director may try to personally inject monies into the company to keep the business afloat, as when times are better, they can take out the monies that they have invested into the business. This is all well and good when there are spare monies that the director can invest into the business, but if not, then the directors may consider taking on a loan and this is where directors may seek the financial support of the bounce back or CBILs loans.

Directors have signed up to these loans, as it has been reported that there is no personal guarantee required, unlike normal loans from the company bank which normally require a signed personal guarantee, a debenture, and sometimes a fixed charge on the directors own personal property.

The problem comes when the company goes into liquidation and it is discovered that the directors have taken a bounce back or CBIL loan and then used these monies to reduce their own directors loan account, or pay themselves in preference to other creditors. This is a clear preference by the directors and is caught by the Companies Act and Insolvency Act. Any liquidator will have a duty to personally pursue the directors for the repayment of these monies, due to the preference being made. We are now pointing this fact out to directors who come to us to seek assistance and it is also covered in our letter of engagement.

A glance of the company bank account will quickly uncover any lump sum payment to the directors just before the company closes and enters liquidation. The loans have been offered to help with the company cashflow problems and there is no problem if these loans have been used in the ordinary course of running the business.

Directors need to be aware of the fact that although they have not given a personal guarantee for the bounce back or CBIL loan, if they have misapplied those monies, they can be personally called upon to pay these monies back to the company.

Under the Insolvency Act 1986, when a company enters administration or liquidation, the conduct of the directors leading up to the insolvency will be investigated to find out if the directors have acted wrongfully or unlawfully on any transactions of the company. One thing that is looked into is if the company have given a preference to any creditor that puts that creditor in a better position that if the transaction was not done.

The directors of the company are acting as officers of the company and it is incumbent that the directors to maximise returns to all types of creditors once insolvency is threatened. If directors do not adhere to this, then it could be viewed as acting unlawfully. Directors have a duty to set aside their own interests and those of the company and they must ensure that creditors within each type of class of creditor, are treated equally as far as repayment, or losses are concerned.

A preference occurs when a particular creditor is placed in a more beneficial position, which is to the detriment of the remaining creditors in that group. An example would be, repaying a loan from someone connected to the company, such as a directors relative, or making sure that a creditor is paid simply to encourage an ongoing business relationship post insolvency and after the liquidation of the current company.
If a director has provided a specific lender with a personal guarantee, they might be inclined to repay this loan first to protect their personal finances if they have given a personal guarantee. Preferences also includes the transfer of assets of the company, in addition to just cash payments.

When deciding if payments should be treated as preferential, consideration needs to be given to the length of time between the transaction and the onset of insolvency. There are two aspects that need to be considered, namely:

If the transaction involved a ‘connected party’ such as a relative of the director and the timescale for this is two years before the onset of insolvency.

This period is reduced to six months if it is to a non-connected person.

The date of the insolvency is the date on which the winding up begins in a liquidation.

The directors could face personal liability for some, or all of the company’s debts if a preference is found to have been made. The liquidator will apply to court for the transactions to be set aside and legal action can be commenced against the directors.

• Debbie Cockerton is a partner at DCA Business Recovery

Care should be taken when considering the best action to take when a company is financially struggling and DCA operate the dedicated ICPA freephone number for all ICPA members and we are also able to hold all meetings virtually, which will increase the scope for assisting ICPA members far and wide and DCA can be contacted on 0800 066 2540 seven days a week, from 8am – 8pm.

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