The Bounce Back Loans Scheme (BBLS) was introduced by the Government in May 2020 to help UK businesses access finance quickly during the Covid-19 pandemic, with many businesses facing the very real prospect of failure.
Over 1.5 million businesses took advantage of the scheme between May 2020 and 31 March 2021 (when the scheme closed to new applications), alongside other support offered through schemes including the Coronavirus Job Retention Scheme (furlough).
The BBLS offered Government-backed unsecured loans of up to £50,000, meaning directors were not required to make any personal guarantees, while a range of indulgences were introduced to help businesses keep trading through the Corporate Insolvency and Governance Act 2020. These included stringent limitations on compulsory winding-up except in situations where the petitioner could demonstrate that COVID had no effect on the business, or that the debt would have been unpayable regardless of COVID, to enable businesses to keep trading if their operations had been affected by the pandemic in any way.
Nevertheless, while the loans are unsecured it remains the company’s responsibility to repay the initial loan amount, together with any interest accrued. With the continued impact of Covid-19, coupled with the subsequent ongoing cost of living crisis, thousands of company directors are finding it difficult to repay such loans as they become due.
A question we are often asked is whether a company can walk away from a bounce back loan in the event that it becomes insolvent, and whether, in such circumstances, the Directors face any liability to repay the loan?
The good news is that incorporated businesses are legally separate from their directors, which means that in most cases, the director can’t be held liable for the company’s debts should it fail. Furthermore, Bounce Back Loans are unsecured and don’t require a personal guarantee from directors, meaning that in the event of the company being unable to repay the loan due to insolvency, the responsibility for repaying the bank falls to the Government rather than the director.
If you have a Bounce Back Loan you cannot repay, strike off is not an option, as this process is only applicable to companies that are solvent. Instead, the closure of the insolvent company will need to be achieved via a formal liquidation process (such as a Company Voluntary Liquidation) which must be administered by an insolvency practitioner. Placing the company into liquidation ensures the business is wound up in such a way as to ensure the interests of any creditors are treated properly.
However, the situation can change if the Directors are proven to have failed to fulfil their statutory duties. Insolvency investigations will assess how the Directors have behaved and whether there has been any impropriety or malfeasance, such as misallocating funds, providing false information or failing to give proper weight to the interests of creditors during the insolvency process.
The key issue with the BBLS is whether the Directors can demonstrate that there was a “reasonable expectation” that the loan could have been repaid and whether they acted in a manner that helped to protect creditors. Simply put, was there a reasonable chance that the business would be able to survive the pandemic and continue trading (and eventually repay the loan).
If not, a director could potentially face disqualification from office for anywhere between 2-15 years. Personal liability for repaying the outstanding loan amount, as well as other debts owed to creditors, is also a possibility in this scenario.
Bishop & Sewell’s Litigation team has already supported a number of clients who have been challenged to demonstrate that the decisions they made were reasonable – i.e. that there was there a realistic chance that the business would survive and the loan could be repaid.
During the Covid-19 pandemic, a great many businesses were insolvent for at least a period, due to the impact of Government-imposed lockdowns which severely curtailed their ability to trade. It was for this exact reason that the Government introduced the BBLS to help prop up struggling businesses through the worst of the pandemic.
Many directors obtained loans in good faith but have since gone on to see their business fail due to the challenging economic climate. However, a key question for the Government since the economy reopened has been the question of fraud surrounding the BBLS. According to the National Audit Office, it is thought somewhere in the region of 11% of the loans were fraudulent, totalling an estimated £4.9 billion.
The Government has tasked the Insolvency Service with investigating fraud in relation to the BBLS and announced a new bill in 2021 that enables HMRC and Insolvency Services to investigate businesses which are believed to have deliberately abused the BBLS, including whether a CVA was improperly used to avoid repaying such loans and other Covid-19 support. The scale of the task is potentially huge, and it remains to be seen how much resource will be put towards investigating and prosecuting such cases.
In many cases, Director’s face accusations of BBLS fraud due to errors made when applying for loans or as a result of not understanding the rules. If you are facing an investigation or accusation of BBLS fraud, it is vital to engage a specialist solicitor as early as possible. Such accusations can be personally distressing, especially if you believe you have acted lawfully, and the penalties for Directors can be severe including fines, disqualification and potentially imprisonment, so it is essential that you seek legal advice.
Contact our Insolvency and Debt Recovery team
Stephen Wade, is a Partner specialising in Insolvency and Debt Recovery in our expert Dispute Resolution team. You can contact him on 020 7692 7578 or you can email him on swade@bishopandsewell.co.uk.
The above is accurate as at 17 November 2023. The information above may be subject to change.
The content of this note should not be considered legal advice and each matter should be considered on a case-by-case basis.
