Impact of Bounce Back Loans

We are seeing a large number of enquiries from directors, and former directors, who have received a letter from the Insolvency Service (or solicitors representing the Insolvency Service) which seeks answers to questions concerning the application for and the use to which they put the bounce back loans that their businesses had applied for during lockdown. It is an area which is seeing a growing source of director disqualification allegations and, as importantly for the directors, an increasing number of compensation orders being sought by the Insolvency Service. In this article, we look at the background to this growing concern for directors and the possible ramifications for the directors.

Use of bounce back loans by directors

The Government introduced Bounce Back Loans (“BBL”) during the Covid-19 pandemic – it was done to assist SME’s who could claim to have been adversely affected by Covid-19. These loans were available regardless of what business your company was involved with. As a result of the scheme a company could obtain a government protected BBL of up to £50,000 (on a low interest basis) to get the company through the Covid-19 pandemic based on an application to a bank who was providing the government backed funds.

There was little, practical, actual guidance offered to companies or directors as to what you could use the bounce back loan monies for. The money, it was generally understood, had to be used for business purposes, not for the purposes or the benefit of the individual director(s).

As we were aware at the time and have become even more aware, since, most companies were affected differently each with their own challenges and financial difficulties. The government decided that, as a result, rather than set out specifics as to the allocation they chose to leave it to the individual directors to make that choice. The only point that was made to the business community was that any bounce back loan has to be used for the financial/economic benefit of the company itself as the directors decided.

Whilst a large number of companies and directors did use the funds obtained through a bounce back loan – for some of the following issues:

• paying utility bills
• purchasing stock
• monthly outgoings – including usual salary payments
• marketing, advertising your business to generate new business
• ensuring cash flow reserves.

There were a number of directors who took the BBL out to specifically benefit themselves or others and not, in any way, used for the benefit of the company – to secure, as much as possible, its future. The information that has been obtained since the end of the pandemic shows that there was a certain degree of fraud committed by the those who took out the BBL. This was done either by:

• making an application for a BBL despite their business not meeting the criteria necessary to apply for the BBL; or
• making an appropriate application for the money, but then once the money in the form of a BBL had been received they then misused the funds which were obtained.

The directors who fell within the first example above usually did so by either exaggerating the turnover of the company within the application or by utilising a company that had actually already ceased trading. The directors, who fell into the second example above, in the main were those who used the BBL funds for their own personal benefit rather than for any actual business expenditure – which was of course the purpose of the BBL that they had applied for.

Bounce back loans and the rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021

Having now come out of the Covid-19 pandemic, what is clear is that the government is keen, where at all possible, to see the recovery of as much money as possible. This is especially the case where there is a belief that the BBL was either applied for in a fraudulent way or used by the company in a fraudulent way.

As we have moved away from Covid-19 there has been an increase in corporate insolvencies. In cases where the company becomes insolvent and as a result has been unable to pay the BBL or where the director has tried to strike the company off to try and avoid the repayment of the BBL as a result. In order to try and assist the insolvency practitioners and the relevant investigatory authority – the Insolvency Service – the government introduced the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 – in December 2021. The purpose of the legislation was to reinforce the powers of investigation when a company has struck off, at the director’s initiation, while there is an outstanding BBL.

The effect of the introduced legislation is to create a double benefit in respect of going after those who have applied for and used a BBL incorrectly.  The first effect of the bill was to provide for an increase in the investigative powers in relation to the proposed strike off of an insolvent company.

In addition, the Insolvency Service can as a result of the new powers within the legislation restore those companies which have been dissolved. This can be done if the Insolvency Service believe that there is evidence that BBL fraud could be suspected. What is inescapable is that the new legislation will make it far more difficult for a director to close a business pretty much solely to try and avoid any issues with unpaid BBL.

The potential repercussions for abusing the bounce back loan will, ultimately, depend on the amount and severity of the size of fraud. The penalties are many and they range in severity and consequence. The directors who are found to have breached the legislation, taken out BBL – incorrectly – and ultimately used them for incorrect purposes can, amongst other things, be fined, be subject to a director disqualification investigation that can lead to proceedings and an order preventing you from being involved in the promotion, formation or management of a company for a period of time between 2 and 15 years. They can also be made, as part of the disqualification proceedings, subject to a compensation order. Again, this is settled by the Insolvency Service as a result of behaviour and decision making in the run up to the insolvency of the company.

The most important thing is that, if you find yourself in a position where you have been contacted by the Insolvency Service concerning your behaviour as a director, you seek advice as to your position and the options that you have to deal with the issues raised by the Insolvency Service.

Contact our insolvency lawyers in West Kent (Hadlow), Ashford, Brighton & Hove, and Uckfield

If you are a director of a company and are facing issues with bankruptcy and debts, or if you have questions regarding bounce back loans or the insolvency service and financial support, please get in touch and we can discuss the various options available. Contact partners Richard Ludlow or Alistair Rustemeyer in our Restructuring & Insolvency team or call 01732 441695 for an initial conversation on the courses of action you have available.