Did you buy a Rolex with the monies you got from the Bounce Back Loan Scheme [BBL]? Or perhaps a second-hand Porsche? If so, you are probably guilty of fraud under the terms of the Government’s BBL scheme-notwithstanding the fact that your company is maintaining the monthly repayments due to the accredited lender. This article is not looking at out-and-out fraud, but rather will seek to concentrate on the possible pitfalls that Directors may face when such loan cannot be repaid by the company which is insolvent and may well need to go into a formal insolvency procedure.
Let us remind ourselves of the history and main features of the BBL scheme. The Department for Business, Energy and Industrial Strategy (DBEIS) launched the BBL scheme on 4 May 2020, offering loans of up to £50,000, or a maximum of 25% of annual turnover, to support businesses during the COVID-19 pandemic. 24 scheme lenders, including banks, building societies and peer-to-peer lenders were accredited by the British Business Bank [the Bank] to make such loans which were guaranteed by the Government. The scheme had limited verification, and no credit checks on borrowers, which made it vulnerable to fraud and losses. Hardly surprising, given that the scheme aimed to deliver money to borrowers within 24-48 hours of applying.
Around a quarter of all UK businesses applied to the scheme, and 1.5 million BBLs worth £47 billion were made. Over 90% of these – or £39.7 billion – went to micro-businesses with a turnover below £632,000. When the scheme launched, DBEIS expected to support between 800,000 and 1.2 million businesses, with £18 billion to £26 billion of loans
My, but did it prove popular, with a fixed annual interest rate of 2.5%, no repayments for the first 12 months and a 6-year repayment period, by January 2022, DBEIS estimated that between 31% to 48% of BBLs in excess of £17 billion would not be repaid. Some commentators have suggested that the non-recovery rate could exceed 50%. This percentage represents both borrowers who would want to repay but are unable to, and borrowers who took out a loan fraudulently. As of 30 September 2021, the Bank’s data shows £2 billion worth of loans had been repaid, and £1.3 billion of loans had been defaulted on. As at 10
January 2022, over 86,000 borrowers had been in arrears for over 90 days.
In March 2021, the Department estimated that 11% of BBLs worth £4.9 billion were fraudulent, but these figures are highly uncertain. The estimate excluded some types of fraud, for example, where a borrower overstates their turnover and gets a larger BBL.
The loans were made on the condition that they were not to be used for personal purposes but instead utilised for an “economic benefit” for the business e.g. working capital.
The Government has always made it clear that if misconduct in the obtaining and application of the loan is established, then the consequences could be winding up by the Court, disqualification as a director, jail, and compensation sought from directors. This is happening now with a number of cases of disqualification and imprisonment highlighted in the press.
Directors will face difficulties if the BBL was utilised:
- Simply immediately taken as director salary/bonus
- To pay dividends to shareholders • Utilised to reduce a director loan account
- Taken as a director loan from the business
- Handing monies to third parties/family with no real connection to the business
- Utilised to purchase items that do not fall under the heading of “economic benefit” for the company
If the director can make a business case for how the loan was utilised, then misconduct will not be established and, notwithstanding that further down the line, the company may have to be liquidated, no personal consequences should ensue. For example, if the loan was, over a reasonable period of time, partially used to pay director salaries, at the monthly rate that prevailed before the pandemic hit, then such a utilisation of loan monies could not be described as not for the “economic benefit” for the company. Directors were not expected to live on fresh air alone!
In conclusion
Despite the best efforts of directors, utilising the support offered by Government to save their businesses, other economic pressures will lead to company’s becoming insolvent. The vast majority of directors took out BBLs, in good faith, and accordingly, they should have nothing to fear should a formal insolvency process ultimately be required for their business.
As always, early professional advice should be sought from a Licensed Insolvency Practitioner.