At the outset of the pandemic, the UK treasury announced a series of measures aimed at protecting the business community from the full natural effects on businesses of lockdowns, enforced closures and other restrictions to trade.
One such measure was the introduction of the ‘Bounce Back Loan’ (BBL), a scheme for businesses impacted by the Coronavirus pandemic and by which they could apply for finance of up to £50,000 to support them through the crisis. There were qualifying criteria but these were considered to be somewhat loose., which made them very attractive to business owners, as they were generally interest free and did not require any personal guarantees. For the significant majority of businesses these loans were a vital lifeline, however it has become a widely held view that these loans were open to abuse and misappropriation of the funds by unscrupulous directors may not have been uncommon.
In an insolvency event, these outstanding loans become an unsecured claim by the lender who will only be able to rely upon the Government guarantee when all efforts at recovery have been exhausted. Naturally, the Treasury will wish to maximise recovery for the taxpayer and, between the lending institution and the Treasury, there is going to be considerable scrutiny of how the funds were actually utilised if they cannot be repaid.
Consequences for Directors
In the event of an insolvency, the consequences for Directors will be largely twofold; firstly, the Insolvency Practitioner is obliged to investigate director’s antecedent conduct, and that includes their treatment and use of any BBL funds. If any offences have been committed under the Insolvency legislation, such as preference or misfeasance, (in other words, if they improperly improved their own position in some way or otherwise misappropriated funds), then the IP has the powers to pursue a director or any party who has unlawfully benefitted, as they would in any other scenario.
The second aspect is within the disqualification regime, where The Insolvency Service acts on information supplied by the IP pertaining to the director’s conduct and pursues disqualification proceedings. The first such cases are starting to be reported, such as the examples below, and these will undoubtedly represent only the tip of the proverbial iceberg.
- A director has been disqualified for 12 years for a blatant transfer to themselves of Company funds including the full BBL obtained 2 weeks previously,
- In a separate case a director has been disqualified for 11 years for falsifying the application for a BBL and misappropriating the funds.
These situations are examples of blatant abuse, and the disqualification periods are therefore at the higher end of the scale with the range of 10 to 15 years reserved for the most serious misconduct cases. However, they are indicative of the attitude that the Insolvency Service will take towards misuse of BBL’s. The Insolvency Service also have the power to consider taking other criminal proceedings.
What to do (or not to do)
Clearly if a BBL has been appropriately obtained and the funds utilised properly for the benefit of the business, then this will be identified and won’t result in such proceedings, even if ultimately, an insolvency event becomes unavoidable. It is virtually impossible to remedy these situations after they have occurred, short of the director personally reimbursing the Company but, if a director has concerns then they should seek advice from a licenced insolvency professional. In our experience to date, the directors who appear most uncomfortable about facing the prospect of putting their Company into formal insolvency have tended to those with least to be concerned about.
If a director chooses to do nothing, and the BBL remains unpaid, then ultimately the Company will find itself being wound up by the Court. In a compulsory liquidation the investigations are undertaken by the Insolvency Service, with arguably more serious and rapid consequences as the access of that agency to the sanction and prosecution regime is more immediate and not constrained by commercial considerations.
The Insolvency Service has also successfully exercised its powers to petition the Court to wind up numerous Companies that have abused the Government support measures and falsified applications for both BBL and CBIL loans.
Recent legislation has also been passed which will facilitate the investigation of companies which have been struck off voluntarily upon the application of directors during the Covid period but where Government loans have remained unpaid. There has been an ill-judged belief amongst some business owners and directors that the lenders or the Government will have more to worry about than chasing struck-off companies to repay these loans and other misappropriated grants.
The stance of the Insolvency Service to the misuse of BBL’s and the action that will be taken if necessary is only now becoming clear and it is evidently a hard-line approach in the most obvious cases; the recent legislation regarding the dissolution of debt-ridden company’s is evidence that the net is being tightened further.
It is always best to seek advice from a Licenced Insolvency Practitioner if you or any of your clients have concerns on this subject or in relation to any wider insolvency issues. Impartial advice, sought early, may resolve potentially unnecessary concerns, or assist a director’s understanding of the full consequences and enable them to face them accordingly.