Bounce Back Loans and the Risks for Directors in Insolvent Situations

The Government’s loan support schemes have helped many businesses to weather the storms caused by COVID-19.  By the end of June, over 1 million loan applications had been approved amounting to total lending of £42.9bn, of which £29.5bn related to the Bounce Back Loan (BBL).

Unlike the Coronavirus Business Interruption Loan (CBIL), for which there are substantial financial checks within the application process, BBLs by contrast are based on self-certification by the applicant.  In most cases, the application process, which is entirely online, takes less than 5 minutes to complete and with minimal checks carried out by the lender before approving. 

For directors desperate for working capital, the ease of the application process, coupled with the fact that the loan is backed by the Government and with the understanding that sanctions for “wrongful trading” have been temporarily suspended, has led many to take out a BBL and spend the money without necessarily considering the implications of their actions. 

Leaving aside the obvious cases of blatant fraud, which industry experts believe could account for up to 15% of all BBL applications, many directors may have exposed themselves unwittingly to future risks, because their company did not meet the eligibility for a BBL.   The key requirements are:

• The company was not insolvent as at 31 December 2019
• The company was active and trading as at 1 March 2020
• The company was not in a formal insolvency solution at the time of the application

When a company enters into insolvency the appointed officer holder (Administrator, Liquidator or CVA Supervisor) is required to track back to the last known point of solvency, in order then to ascertain how company funds have been spent since that date.  If a BBL has been used simply to pay off other creditors preferentially at a time when the company was technically insolvent, then the office holder may well seek to recover these funds, in order to distribute fairly across all creditors.  Furthermore, notwithstanding the temporary suspension of wrongful trading sanctions, the office holder is still required to investigate the general conduct of the directors and report accordingly.

Government guidance is that loans should be used “for the economic benefit of the business, which may include wages”.  The best way to utilise a CBIL or BBL therefore is on business recovery, investing it to get the business trading again.  At the same time appropriate payment plans should be set up with existing creditors, including landlords and HMRC, to ensure that company funds are being allocated fairly.

It is important therefore that directors do not, unwittingly, store up trouble for themselves by doing what they think is the right thing.  If in any doubt then they should seek advice from their accountant, an insolvency practitioner or other professional advisor.