During the lifetime of the Bounce Back Loan Scheme, 1.5m businesses opted to take a BBL, with 58% of them opting for the maximum £50,000 loan, according to a recent National Audit Office report. In total, £47 billion was lent under the BBL scheme.
Due to the unprecedented situation under Covid, the government opted for speed of delivery of BBLs so there was no time for lenders to put comprehensive fraud prevention and detection mechanisms in place. This speed has led to higher fraud levels than for usual bank borrowing.
As a result significant “after the event” effort is being made by the government to recover funds obtained dishonestly. This article looks at what can be done legally to help a company director if they can’t repay a Bounce Back Loan.
What were the guidelines for using a Bounce Back Loan?
Guidance from the British Business Bank stated, “…the loan will only be used to provide economic benefit to the business…”. The provision of working capital is an example given. The Bank’s guidance goes on to explain that a BBL is not for personal purposes.
Martin Lewis, founder of MoneySavingExpert, asked the Treasury to elaborate on this and included the reply in the ‘Martin’s Analysis’ of his website. Martin commented that he received written information from the Treasury confirming that supporting income was an acceptable use of the loan and indeed that obtaining a loan for that purpose was possible.
We refer to the MoneySavingExpert article as useful background rather than as definitive guidance.
Alongside the above, R3 (the trade association for the UK restructuring and insolvency community) published a useful set of FAQs around the BBLS. These are for reference only and while they cannot be relied on as formal guidance, answers included that if “…they used the BBLS loan monies to draw funds for reasonable living expenses at a rate similar or lower to that of pre-pandemic then it would be difficult to justify taking action against the director…”.
The references above are part of multiple factors that must be used to determine if a BBL was obtained or used dishonestly.
Whose role is it to check if a Bounce Back Loan has been used correctly?
There’s a number of agencies who have been tasked with identifying the dishonest use of BBLs. The government has set aside £32m to go towards its “enhanced” counter-fraud operations, and a further £67m for administrative costs of the scheme until 2024/25. There has also been publicity surrounding police raids on individuals who were accused of BBL fraud.
Alongside the government, banks and regulated professionals will also be expected to look out for the dishonest use of Bounce Back Loans. In addition to upholding their professional ethics, there is a requirement under Anti-Money Laundering laws for suspected illegal activity to be reported immediately to the government.
What if I can’t repay the Bounce Back Loan
Despite government support, slow economic recovery and a lack of confidence in both consumers and businesses means that repaying a BBL might be too much pressure.
If they can’t repay a Bounce Back Loan, company directors should seriously consider taking advice from a regulated professional regarding the options for their company. In some situations, a company liquidation may be the only option.
By going through a company liquidation process, the money a company owes is settled, as far as possible, from any value in the company and its assets. The outstanding amounts are left unpaid.
Does a liquidator of a company need to investigate the reasons for failure of a company?
In the case of an insolvent company, the liquidator is legally bound to review the activities of the company and decide if one or more of the directors is responsible for its failure.
The pandemic has taken us into new territory as licensed insolvency practitioners. Supporting business owners who are forced to close their company through no fault of their own is surprisingly common. But multiple businesses facing the same issue at the same time is unprecedented.
As insolvency practitioners, we have needed to apply insolvency law and guidance to a set of circumstances that definitely weren’t foreseen at the time the guidance was prepared.
A mixture of knowledge, experience and common sense has had to be applied to each individual company situation to make a distinction between directors who have acted dishonestly and those who have been simply unfortunate and now can’t repay a Bounce Back Loan.
Is striking a company off at Companies House an alternative to liquidation?
If you appropriately notify those owed money by the company, and if the liquidation is not objected to, a limited company with debts could be struck off from Companies House.
We’ve been told that attempts to strike companies off that have an outstanding BBL have been blocked by the BBL scheme. This seems to be consistent with the experience of others in the business rescue and insolvency sector.
Even if you do “get away” with a strike off, how will the government be able to tell your company from one that’s been struck off as part of a fraud? It seems logical that, at some point, the government will start to reinstate companies to the register so they can be investigated, and dishonest directors prosecuted.
This firmer action was initiated on 16th December 2021 when the government announced a crackdown on directors who dissolve companies to evade debts.
What’s the answer?
There is no single answer.Our advice is always tailored to the individual circumstances of a business. Similarly, if we have to investigate a company as part of our role as insolvency practitioners, each situation is judged on its own merits.
We would like company directors to understand that, if they simply cannot repay their Bounce Back Loan, help is out there. They definitely won’t be the first to have to consider the options for their company’s future. It must also be remembered that a business which would be viable without debts may be able to consider a restart through a formal insolvency process.
Company directors must make sure that detailed discussions with an insolvency practitioner take place before any decision is made to liquidate a company. All the alternatives must be duly considered and any likely consequences for directors discussed. These will of course depend on the circumstances.
