Reasons Not To Fear Bounce Back Loan Repercussions

We are coming across an increasing number of enquiries from our accountant contacts who have clients in financial distress but who are reticent to seek professional advice because they took a Bounce Back Loan.  This concern is being fuelled by the increasing publicity around fraud investigations and threats of company Directors being held personally liable if the loan funds were misused or if the application criteria was not spot on.
 
However, if a business is in serious financial distress, then such concerns are only deferring the point at which a Director has to take action …… or a creditor might do it for them now the restrictions on aggressive debt enforcement are being lifted.
 
Directors might be tempted to consider a voluntary striking off application.  However, in response to the unprecedented increase in strike offs during the pandemic, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act has recently been passed.  The aim of this Act is to prevent dissolutions where there are outstanding BBL and CBIL loans and also to investigate those companies already dissolved where there has been no investigation into the conduct of the Directors.  This is something we have covered in detail in a separate article which will be circulated in a few days.
 
In this article, however, we thought we would take a brief look at some of the issues surrounding the use of Bounce Back Loans and some of the guidance that has been issued to us as Insolvency Practitioners to help determine what is and what isn’t OK.
 
What’s Not OK?
 
Let’s deal with the easy ones first.  There are some cases now being reported of prosecutions of Directors who had fraudulently applied for loans or have misused the loan proceeds.
 
Recent examples include a Director who obtained three loans on three companies and later placed those companies into liquidation.  The liquidator’s mandatory investigations established that bank accounts had been opened during the pandemic for the previously dormant companies for the sole purpose of fraudulently obtaining loans of £50,000 each.  The funds were paid out to themselves and other parties and were even used to purchase a Rolex watch.
 
These Directors have already been disqualified from acting as Directors by the Insolvency Service and no doubt are facing legal action by the liquidator to recover the funds.
 
The Insolvency Service have also reported recent Director Disqualification cases where the common theme is statements of inflated turnover by Directors in order to obtain the maximum loans of £50,000.   The turnover in one particular example was no more than £7,600!  The offences are compounded by applications from groups of associated Companies.
 
These cases have resulted in Disqualification Undertakings of between 11 and 13 years.  The maximum Disqualification period is 15 years so this clearly sends a message of how seriously the matter is being taken by the Insolvency Service.
 
What is OK?

Firstly, did the loan application meet the criteria?  The key terms were set out by the British Business Bank and the key points for most applicant companies would be the requirements to be a trading entity as at 30 March 2020 (hence dormant companies and these set up after this date would fall foul of these requirements) and the amount applied for does not exceed 25% of turnover.
 
The British Business Bank term also states that the business must confirm to the lender that the loan will only be used to provide an economic benefit to the business, for example providing working capital and to aid cashflow.  The terms state specifically that the funds cannot be used for personal use.
 
In simple terms, funds from a BBL must have been used to support trade and commercial activity.  Payments to suppliers, landlords and other ongoing costs are generally OK and in the spirit of keeping a business going during some extremely difficult trading circumstances. 
 
Payment of staff salaries (subject to any furlough benefits that might also be claimed) is permitted and paying directors salaries and drawings at the normal pre-covid level are also permitted.  However, we will return to this point later below.
 
The BBL could also have been used to pay off / restructure existing finance providing there is an over-all benefit to the company in doing so.
 
So What About the Grey areas?

Things can get a bit more tricky if some or all of the BBL loans have been paid out on transactions that don’t fit firmly into the intended uses of the loan.  In most instances, the loan monies will have been dissipated through a number of smaller transactions and not simply one or two larger transactions.
 
Starting with Directors salaries, we have established that continuing to pay directors salaries at or below pre-pandemic levels should be ok.  However, most small businesses are Director / Shareholder owned and commonly use the system of making payments “on account” to a director, creating an overdrawn loan account and at the year end, declaring a dividend to eliminate the overdrawn balance.  However, the pandemic may well have curtailed the ability to make profits and therefore pay dividends, leaving a director high and dry with a loan account balance that a liquidator will be looking to collect from the Director.
 
We have also seen examples of BBL funds being used to repay loans already made to a Company by its Directors.  Whilst restructuring existing finance was permitted, there has to be a commercial benefit to the Company in doing so.  There is also the risk that such transactions may be deemed preferential payments if the Company subsequently enters a formal insolvency process
 
How Can We Help Concerned Directors?

We can review and analyse the use of BBL loan funds in detail and can explain to you and your clients any areas of concern that we might discover.  Our aim is to make those grey areas a little more clear and look at the context in which the loan was obtained and how the monies were used.  The pandemic threw up some extreme challenges for Directors and understanding the position at that time and the background to decisions taken by Directors can be very important.
 
Please contact Matt or Andy if you have a client scenario you would like to chat through and would like to understand more about the questions that might be asked about the use of BBL loans.