The benefits of Bounce Back Loans and the Implications of their miss-use upon Liquidation.
It was reported last week that 1.26 million bounce back loans (“BBL”) had been granted in the UK since its introduction and therefore the sums loaned to businesses are now likely to have reached the £50 billion mark already. With the scheme running until January 2021, even more money will be handed out to small businesses in the coming months and therefore this article covers not only the general benefits of BBL’s but also offers a balanced view of the implications to directors if they mis-use their BBL monies and then find that their business cannot be rescued and be placed into Liquidation.
What is a bounce back loan?
For those of you unaware of the scheme, it is government backed funding available to small businesses of between £2,000 and 25% of their annual turnover (up to a maximum of £50,000). They receive terms of only 2.5% interest, sign no personal guarantees, pay no interest in the first 12 months, have no payments in the first 12 months either and have a repayment period of up to 6 years.
If you have ever tried to get funding in the past then you’ll know that these rates and terms are fantastic and the fact that the government guarantees the loan (as opposed to its directors having to) is a benefit too tempting to turn down for most directors whom may have suffered as a result of Covid, but could arguably have otherwise got by without it. This does however mean that the BBL scheme may be widely open to abuse.
The main criteria which Directors must confirm that they comply with, to obtain the loan, are to simply confirm that
- Their business was trading at 1st March 2020
- That they have been adversely affected by Covid
- That they weren’t in financial difficulty at 31st December 2019; and
- That they haven’t already applied for a BBL or CIBIL.
What are the benefits of a Bounce Back Loan?
Loans generally are of benefit in times of struggle due to the ability to consolidate existing debts (pay off higher rate debts and/or pay off multiple creditors, in order to have a smaller monthly repayment amounts due to reducing their interest costs or spreading their repayments over longer periods).
They are also useful to use to invest in things which can help you either retain business (or staff) or increase sales, such as investing in R&D, equipment or marketing, most of which are essential costs to stay ahead in times of high competition and low work levels. Therefore, I have no doubt that BBL’s will have been a blessing for many.
The low rates, delayed initial payments and lack of personal guarantee are also likely to be favourable for many and with most receiving their funds as soon as the day after they have been applied for which offers much needed breathing space promptly. This allows directors the time to focus on how they achieve their business turnaround and not spend time moving money around.
What are the implications of mis-using Bounce Back Loan Monies in the event of Liquidation?
Given the high number of companies that have applied for BBL’s and the apparent lack of conditions or detailed scrutiny with the application process, my view is that there will be hundreds of thousands of directors whom will have gained BBL’s whom have very little knowledge of the implications of using these monies incorrectly.
In the event of a Liquidation or Administration being required (when the attempts to rescue the Company have failed) a director, or even the beneficiary of a payment, can be brought to account and asked to repay the sums the Company has lost as a result of the transaction. Therefore, the lack of a personal guarantee within the loan terms doesn’t mean that directors are free from personal responsibility, if company funds are mis-used.
See below for a summary of the main circumstances in which a director would be considered to have committed wrongdoing, which would require repayment: –
If it can be proven that the director ought to have known that the Company was insolvent and couldn’t continue to trade, then the losses made from the date it became insolvent, can be claimed from the Director personally. Legislation was passed by government recently to allow directors a brief stay from prosecution for wrongful trading but this stay has now passed and insolvency practitioners are once again able (and required) to maximise realisations for the benefit of creditors by recovering losses from wrongful trading actions, if directors continued to trade wrongfully. Care should be taken by directors to document their decisions and regularly review the performance of their business so as to ensure that they don’t worsen the position for creditors by continuing to trade without any prospect of a turnaround.
This is where it can be proven that the directors have continued to trade with the specific intent to defraud the creditors. However, this is less easy to prove as proving intent is complicated and so is rarely an action brought by an IP.
This is a big one! If it can be proven that payments have been made to creditors which resulted in the beneficiary of the payment being put in a better position than the other creditors, then that beneficiary, or the director, must personally repay these monies in order to restore/repay the loss to the Company. Insolvency practitioners must review whether payments made are preferences within a period of 2 years (if the payment was made to a connected party) or 6 months (if to an unconnected party) and therefore the company’s transactions are reviewed for periods dating back much further than most directors would suspect. Our advice to directors is always to ensure that creditors are paid “in the ordinary course of business”, meaning that the oldest debts should get paid first, or if there is a commercial benefit to the company to making a payment to a younger debt (such as avoiding legal actions, achieving better interest rates or avoiding penalties). Maintaining supplies is also a good reason to make payment, should cut off of supplies be threatened. Given that the terms of BBL’s made clear that they should only be applied for if it “provides economic benefit to the business” (i.e. working capital), if the BBL monies are used for things such as paying director salaries not drawn for many months, or to buy a new car, pay an associated company, or pay a friendly creditor, but avoid paying other creditors such as HMRC, then directors will more than likely be held accountable for mis-using their funds and be asked to repay the preferences to the insolvent estate.
Transactions Defrauding Creditors & Transactions at Undervalue
Transactions should not be undertaken which result in the interests of creditors being prejudiced or is done at undervalue. This is usually a gift of assets for no value or for significantly less than their true value and is often to connected parties. I envisage that there will be many circumstances where Directors will consider it appropriate to purchase assets with BBL monies and then sold at an undervalue to connected parties, or for personal assets to be bought by the Company which it has no benefit for. Therefore, any asset sales or purchases should be done with the support of an asset valuation showing it as a fair value and Directors should be prepared to explain why the Company benefitted from the transaction
Overdrawn Directors Loan Account / Illegal Dividends
One very common scenario Liquidators see is where directors have a certain standard of living which they are used to in profitable times then in hard times these spending habits continue despite the Company not making profit. In these times of Covid restrictions and changes in buying habits, a large proportion of businesses will have suffered a drop in turnover therefore, if directors continue to draw out monies from their business at their same rates, these monies have essentially come from their BBL monies. The trouble then starts for directors when they are unable to rescue their business and must place it into liquidation or administration upon which the Liquidator will review the spending/movements with by the director and consider these to be either illegal dividends (being dividend drawings from a loss making company) or be considered to have an overdrawn directors loan account. Both of these are repayable in full and therefore directors must be sure that they know where they stand here and manage the business spending.
- Record your decision making.
- Monitor the Company’s profitability as trading continues to ensure the position improves.
- Do not make preference payments to some creditors unless in the ordinary course of business.
- Pay only legitimate business costs and don’t pay director salaries not drawn for some time.
- Be prepared to explain why a purchase or trading was beneficial to the business.
- Do not sell assets at an undervalue or buy assets which the Company has no use for.
- Reduce spending, ensuring that dividends are only taken if the Company is profit making.
- Make sure that director’s loan account do not go overdrawn, where possible.
If you’re reading this and you suspect that you (or perhaps your client) may have fallen foul of these common habits then please do give us a call as Bridge Newland Limited can advise you on how best to deal with this in order to avoid having to pay large sums back but still be in the best interests of the creditors.
We often agree repayment plans with directors to spread the repayment of the above, over many months and years, or can, in some cases, write off some repayments if directors have an inability to repay these sums and therefore our advice is best sought to know where you stand.
Bounce back loans also have 6 monthly repayment holidays providing 6 monthly repayments have been made and therefore look into the terms and consider delaying payments if you believe you can continue but need the breathing space to settle your BBL over a longer time.
All initial consultations are free to charge so give us a call on 0800 612 6197 or fill out the contact us section below.
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