BBL abuse – the Fightback

BBLS abuse – How does the Government get its money back – and how may this impact business owners who face the possibility of insolvency proceedings.

The Background

We are advised that the Government provided more than £73 billion under its support schemes during the COVID 19 pandemic which assisted over 1.6 million firms.

Of these schemes, the biggest by far was the Bounce Back Loan Scheme (BBLS) which was introduced between May 2020 and April 2021.  This scheme offered businesses loans of up to £50,000, or 25% of their turnover to assist them through the crisis, acting as a valuable lifeline to businesses within all sectors of the economy.

The BBLS came with a streamlined application process to ensure the money was available early and when businesses needed it most.  However, this stance left the process open to abuse and it is now expected that a staggering £4.9 billion maybe lost to fraud.

As a response, we are now seeing the government take retrospective action to punish those unscrupulous applicants through the introduction of new insolvency regulation with a focus on the liquidation process.

The attractiveness of the BBLS was its simplicity with borrowings over 6 or 10 years, with no repayments in the first year and a low interest rate of 2.5%.  This, coupled with the relatively easy application process made it extraordinarily successful over the other support measures available such as the Coronavirus Business Interruption Loan Scheme (CBILS) which was more complex and difficult to process.

As a consequence, Businesses needing capital quickly, gravitated to the BBLS which was streamlined with fewer measures and checks than normal.  Although done with the best of intentions, the relaxed lending criteria has allowed some of the more unscrupulous, to take advantage.

So, what Could the BBLS be used for?

The BBLS was introduced to secure emergency funding and was designed to provide accessible capital to keep businesses afloat.  It is therefore perfectly acceptable to utilise the loan to settle liabilities within the ordinary business activities.  These would include using BBLS funds to; –

1. Pay wages and salaries, including directors’ drawings at the normal level that were paid preceding Covid-19.
2. To repay or restructure existing finance, including bank loans, lease or hire purchase agreements for vehicles or equipment.
3. To pay arrears and ongoing commitments regarding commercial rents, rates, utilities, and general suppliers

Perhaps, more controversially, BBLS funds could also be used to pay dividends where a business had retained profits but poor cash reserves.  This is, however, worthy of a broader discussion where the solvency position was more questionable or where there were insufficient reserves.  “Drawings” of this nature may ultimately lead to overdrawn Directors’ Loan accounts and subsequent actions for recovery against those directors.

What constitutes abuse of the Scheme?

For those that follow my LinkedIn posts, you will have seen a number of reported instances of BBLS abuse, but the majority of those seen so far relate to; –

1. Applications by Dormant Entities.
2. Applications overstating period of trading (minimum 12 months required).
3. Applications overstating Turnover to obtain higher loans than entitled to.
4. Multi applications by Group entities – only one application per Group is allowed.

Alongside the above, we have also seen cases where Directors have dishonestly diverted loans, intended to be ringfenced for business use, to their own personal assets or personal use.

A further condition of the scheme is that a Company cannot have a loan under the BBLS and a Coronavirus Business Interruption Loan Scheme (CBILS) unless the latter was used to repay the BBLS in its entirety.  We have seen instances of businesses having both!

Another common tactic has been for Directors to dissolve their businesses to avoid repayment of BBLS loans.   

With this latter example, we would ordinarily see HMRC, Companies House or the Financial Institutions “object” to the proposed dissolution of these entities.  However, with the volume of cases involved, and the re-direction of resources by these institutions to cover Covid 19 requirements, many seemed to have escaped the net. 

The Insolvency Service has the power to investigate when companies are dissolved, and if wrongdoing is found, the Company can be restored so that the directors can be held to account.  However, we understand that some 400,000 companies were dissolved during 2020 and 2021, and it is inevitable that some dubious dissolutions will slip under the radar.

While this money was provided by banks and financial institutions, it has been guaranteed by the government and, as such, will ultimately be left to taxpayers to pay the bill.  In a response to public criticism of how the scheme has been administered, the government has ramped up its powers to bring the abusers of these schemes to book.

The Insolvency Service was therefore granted new powers in December 2021 to penalise Directors trying to escape their liabilities by dissolving companies and avoid repaying government backed loans which could result in them being investigated and disqualified from being a director for up to 15 years.

In the recently reported cases, Disqualifications of between 9 and 11 years have been made.  There is also the prospect of Compensation Orders being given against directors to recover the cash borrowed which range from £15,000 to £50,000.

Is there a conclusion?

One thing is clear, not all businesses that took out Loans will necessarily survive the current trading difficulties and pending recession, despite the initial help received from these schemes which were introduced as emergency funding to keep businesses afloat during the pandemic. 

The government clearly need to be seen to be clamping down on deliberate misuse of the Scheme and fraudulent applications, but a subsequent failure of the business does not automatically mean there has been any abuse of the BBLS. 

As a consequence, directors of these businesses should not be afraid of the process where genuine applications were made.  This makes it all the more important that business owners, who are unsure of the solutions available to them, should seek advice from an experienced Business Recovery Professional.

At Poppleton & Appleby, we can assess all the options and provide honest, practical advice on the best way forward.  For further information or advice, do not hesitate to contact me or the team on 0121 200 2962.

 

Andy Turpin

Partner

Poppleton & Appleby

The Silverworks, 67-71 Northwood Street

Birmingham, B3 1TX