In early 2020 when the Coronavirus Pandemic hit the UK the Government brought in a series of measures to help businesses survive. One key measure was the Bounce Back Loan Scheme. The scheme was introduced in March 2020 allowing small and medium businesses to borrow up to 25% of annual turnover, capped at a maximum of £50,000. The loans offered a low rate of interest for the entire six-year term, no repayments had to be made for the first 12 months and all interest and fees in the first year were covered by the Government. The scheme provided lenders with a Government backed guarantee to make loans to businesses that were losing revenue as a result of the pandemic. The key feature of the Bounce Back Loan Scheme was that no guarantees or security had to be provided by the company or its directors.
On the expiry of the initial 12 month payment free period companies had to look into making the monthly repayments. With uncertainty continuing many businesses found themselves in difficulty making repayments. The expectation had been that by the time the first payment fell due businesses would have returned to normal whereas the reality was somewhat different with businesses finding that they have struggled to survive due to the uncertainty of the pandemic and other factors such as rising inflation and energy costs.
In October 2020, the Government introduced the Pay as You Grow Scheme. This was designed to assist companies with the problems they could encounter when the time came to start repaying the Bounce Back Loans. The scheme offered three alternatives to the borrower, the first being to extend the initial 12 month payment free period for an additional six months. Interest would still accrue, but this option was designed to assist businesses with their cash flow. The second option was to extend the term of the Bounce Back Loan to 10 years, the aim being to reduce the monthly repayments. Finally, borrowers could opt to just pay the interest for six months, thus reducing the interest that was accruing.
Directors of companies who took advantage of the scheme now need to examine the finances of their company to see if they will be able to repay the Bounce Back Loan.
If the Bounce Back Loan cannot be repaid and the company falls into arrears there is an expectation that the lender will take action to recover the debt. If they do, they can demand repayment of the entire balance if the account is not brought up-to-date within a reasonable timeframe. The Bounce Back Loan is like any other loan liability, the key difference being that it was guaranteed by the Government rather than by a personal guarantee from the director. As an unsecured loan, if the company were placed into a formal insolvency procedure and realisations were not sufficient to pay the loan it would be treated like any other unsecured liability. However, directors need to bear in mind that there are potential personal consequences for them.
Any company which has taken a Bounce Back loan and cannot repay it should take insolvency advice, in short, the company will be classed as insolvent if it cannot pay its liabilities as they fall due.
Any director considering simply striking off or dissolving the company should bear in mind that it is not a formal insolvency process but is only an informal way to close the company. The Government has indicated to banks who have provided the Bounce Back Loans that objections to any strike of application should be raised where there is an outstanding Bounce Back Loan. The Government has also announced legislation in its planned clampdown on company directors who seek to take advantage of the company dissolution process to avoid paying creditors and to avoid investigations into their conduct. Under the proposed legislation, any director found to have improperly abused the dissolution process could be disqualified for a period of up to 15 years. The indication is that the new powers will be retrospective to allow the Insolvency Service to investigate directors of companies which have been dissolved prior to the legislation coming into effect. The proposed powers would mean that investigations could take place without there being the need for the company to be restored to the register.
Directors therefore need to carefully consider steps they should take when their company faces financial difficulties. The Insolvency Act provides for rescue procedures as well as procedures which bring the company’s life to an end.
As mentioned above directors also have to be aware of their own personal position. A director who has misused the Bounce Back Loan scheme should be wary of potential personal liability.
There have been cases where companies were not entitled to receive the Bounce Back Loan but successful, albeit fraudulent, applications were nevertheless made. Companies may have been entitled to less than the £50,000 maximum but nevertheless made an application for that amount. It was left deliberately wide-ranging as to what the funds could be used for, but they were designed to be used for business purposes, many rumours exist that the monies were used by some directors for their own personal benefit. In instances where any of the above apply it raises the spectre of personal liability for the director.
When a company goes into liquidation or administration, the officeholder whether they be a liquidator or administrator will investigate what the company’s money has been used for. An insolvency practitioner has a duty to investigate the affairs of the company and to report their findings to the appropriate authorities. They can also take their own legal action to bring in additional recoveries for the benefit of creditors. An insolvency practitioner appointed as liquidator or administrator will be acting in the interests of creditors and if they find a director has taken out a Bounce Back Loan fraudulently or misused the monies a director could face claims such as:
- Misfeasance under the Insolvency Act and a breach of their duties under the Companies Act.
- Overdrawn Director’s Loan Account.
- Wrongful or Fraudulent Trading.
- Unlawful Preference.
- Transaction at an Undervalue.
- Fraud under the Fraud Act.
Directors faced with their company being in financial difficulty have many issues to consider and the prospect of dealing with insolvency issues can be complex and stressful. The best advice is not to ignore them!
If you require any advice, please do not hesitate to contact me on 01273 284055 or email me darren.stone@cognitivelaw.co.uk. You can also visit our insolvency service page for further details on all our insolvency services.