Ltd company directors - Bounce Back Loan as income

goldmine2011

Sorry i did try and find anything related to this but could not so thought i would create the topic.

Martin has confirmed that as LTD company directors we are allowed to use the BBL in order to support our income, i am a sole-director and the sole employee of my ltd company, and so far the only support i have managed to obtain is furlough which for company directors will be minimal because we take most of our income via way of dividend, for which furlough does not cover.

I have taken the BBL and have been using to support my income so far and because my industry has never even had any chance to restart (live entertainment) and most probably wont until late 2021, what happens if i cannot pay this loan back because there purely has been no income at all for the entire of 2020 and possibly 2021?

I believe that the loan is guaranteed by the government and not me personally, so i assume that my only assets (house and car) would be protected somewhat but surely they must've had an incling that most businesses would have burned through this money to keep alive in 2020 and if they have used it for those purposes and have still not had any income then how do they expect the money to be repaid if there is no money coming in? Thanks

Jeremy535897

The straightforward answer is that a BBL may be used to pay wages the company needs to incur, including a sole director's salary. There could however be difficulties if the sole director increases his salary compared with what it was (and you have said that it was low because you took dividends), in circumstances where an increase is not justified (for example if the company is losing money). Given that you were furloughed, and therefore not doing anything for the company (and the company was getting up to 80% of your salary funded by CJRS), it may be hard to justify more than the salary not covered by CJRS being paid using the BBL (even though it is to cover lost dividends). If the company were to become insolvent, questions could be raised. Martin Lewis looks at the issues here, although he does not specifically point out that a company can only pay dividends out of retained profits, and your company may not have any:
https://www.moneysavingexpert.com/news/2020/05/small-business-boost-as-bounce-back-loans-launched/

Otherwise, there is no recourse by the lender to your personal assets (unless fraud was involved in the application) if the company cannot repay the loan. Where borrowers are struggling to repay, the loan term can be extended and interest only payments after the first year are a possibility. There are more details on this and BBLs generally at:
https://www.british-business-bank.co.uk/ourpartners/coronavirus-business-interruption-loan-schemes/bounce-back-loans/faqs-for-small-businesses

It is always best to be up front with a lender if your company is going to have difficulties repaying a loan.

Grumpy_chap

As Jeremy said, the BBL can cover employee's wages, but if the Ltd Co was (and continues) claiming CJRS, then the most that can be funded from the BBL as wages is the 20% top-up above the 80% already funded by the Government.

Being a Ltd Co. provides a "veil" to protect the shareholders personal assets, but does not protect the Director(s) who are required to act in the interests of the company.  If the company is not trading, can the Director(s) truthfully agree a decision to make a dividend payment to the shareholders?  Particularly if doing so will make the company insolvent?  Shareholders may be protected but not the Directors, who could be pursued in that role.

Pennywise

Unless there are historic reserves held in the company, the monies from the BBL can't be paid as dividends - as dividends can only legally be paid out of post tax accumulated undistributed profits.  The BBL receipt isn't profit, so isn't available for payment as dividend.  If the money is drawn out as a directors loan, then it needs to be repaid and, yes, the director's personal assets may be at risk if the ultimate liquidators call in repayment on the loans.  So that leaves wages, which is realistically the only way the BBL monies can be paid to the director - as others have said, suddenly increasing wage levels, especially at a time when trading is impaired, could be challenged, not to mention the much higher tax/NIC payments due to HMRC on a higher level of wages.  So, dividends are probably a no-no, loans would need repaying, and wages may be challenged and costs a lot more in tax/NIC.  That tends to suggest that the BBL funds being paid to the directors isn't really a good idea and certainly not risk free.

goldmine2011

Thanks for your answers guys, yeah i see what you mean now makes sense, i guess that's the overall pitfalls of the whole dividend system as we never expected to see this situation ever happening and somewhat its just a massive cog in the system.

Thought i would ask because im guessing alot of directors will be in similar positions and if its a case of there being money available in order to make ends meet then im sure the majority would take the funding whilst it is there, even knowing of those consequences that might arise. But yeah i think its a bridge that will need to be crossed if necessary, thanks again for the clarity