13 March 2023: As a result of Covid-19’s impact on the economy, companies could borrow up to £50k, often received same day, with a few clicks of the mouse.
Bounce Back Loans
Most bounce back loans were, hopefully, applied for correctly, used for their proper intended purpose and with every intention of being repaid.
When the pandemic hit and trade dropped off a cliff, directors were often worried about how to survive day to day and pay the wages next week let alone how they might start to repay a loan in 12 months’ time.
Fast forward 2 + years…
With many companies opting to take one, two or all three of the 6 month payment holidays available to them under the bounce back loan scheme, time to repay the loan had arrived.
Also factor in the following:
- The ability to defer VAT for 12 months
- The need to restock goods and gear up for trade coming back on line
- Companies couldn’t be wound in the courts and so creditors weren’t pushing clients into liquidation
We now have the perfect storm of companies with no cash and large amounts of debt (typically HMRC and bounce back loans) being pursued by creditors. Understandably our industry is busier.
Each formal insolvency of a company with a bounce back loan requires the insolvency practitioner to consider the following which formed part of the loan criteria:
- That the company was not a business in difficulty as at 31 December 2019
- The company was carrying on business as at 1 March 2020
- Was the correct amount applied for, i.e. no more than 25% of turnover or £50k, whichever was lower?
- Was the loan used for its intended purpose, i.e. to support the ongoing costs of business?
Where these criteria have not been met these facts are reported to the Insolvency Service who will consider whether the directors warrant disqualification.
Misuse of Bounce back Loans
Common mistakes/misuses we see include:
- Using the funds to purchase new personal assets
- Transferring the lump sum to a personal bank account
- Giving the money to a third party, such as a family member or friend
- Funding a significant increase in directors’ salaries or dividends
Having read various press reports, the Insolvency Service appears to be seeing these facts as justification for disqualification, be those intentional or unintentional errors upon application and use of loans. For the Insolvency Service these appear to be low hanging fruit, which are relatively easy to prove and action.
Disqualification terms can range between 2 and 15 years with custodial sentences being handed out in the very worst of fraudulent cases.
This is hot on the government’s agenda as there was so much government guaranteed debt issued and with so much of it being unpaid they are using the tools available to them to ensure that the directors who they see as a ‘danger to the public’ are prevented from causing further harm or losses to creditors.
Grasping the nettle now is often better than kicking the can down the road.
If you are concerned about your company or your client, please speak with any of the experienced management team at BRI Business Recovery and Insolvency and talk to us in confidence, without obligation and free of charge.