In the last couple of months, the government announced the Bounce Back Loan Scheme (BBLS). Its aim is to provide financial support to businesses that have lost revenue and seen their cashflow disrupted as a result of COVID-19.
The scheme gives the lender a 100 per cent government-backed guarantee against the outstanding balance, including capital and interest.
In my experience, these loans have been very easy to obtain. You just need to answer a few questions on a form and, within a few days, the money is in your account.
On the face of it, this has been great news for limited companies, and a very generous offering by the government.
It is very cheap money, easy to obtain, no personal guarantees are required and you don’t have to make any repayments for 12 months. Why wouldn’t you take one out?
The repayments range from £93.95 per month to £939.49 per month, depending on whether you take out £5,000 or £50,0000.
Anecdotally, however, it is clear that many businesses have taken advantage of this scheme.
I have heard horror stories of people setting up new businesses or buying off-the-shelf companies and taking out a Bounce Back Loan (BBL) in each, with no real intention of ever paying it back.
Just recently, there was a video post on LinkedIn about a car showroom which was nearly conned by a “customer” taking a BBL out in its name to pay for a vehicle. Fortunately, the owner of the business was wise to this and noticed it in time, preventing a huge impact on his company.
I have seen companies which are part of a group taking out more than one BBL within the group, which is against the rules of the scheme. There is actually a declaration on the form where you have to confirm that you have only taken out one loan in the group.
The repercussions of this are potentially massive. Apart from the ethical and moral issues arising, the financial losses will hit the country hard, as it is questionable how many of these loans will be repaid.
The impact will very much depend on how hard the banks and government pursue these businesses. In reality, the banks will probably not care so much, as they will be paid no matter what. I suspect the government will take a very grim view, and the NCA and CPS are likely to take these cases seriously.
Following on from the recent arrests made in relation to alleged furlough fraud, I anticipate a number of arrests arising from BBL fraud, which will have serious ramifications for those involved.
From an insolvency practitioner’s point of view, it opens up a huge can of worms. The regulatory bodies need to look at this and provide some guidance.
Ignoring for a second the obvious fraudulent loan applications (for example, companies that have never traded and/or have lied about their turnover), there are still potential issues for seemingly genuine borrowers who have taken out a loan to try and save their business.
In my view, the vast majority of SME liquidations that we encounter over the next 12 months will have a BBL, and not a penny will have been repaid.
Given the short timescale between taking out the loan and cessation of trading, there may be an inference that the borrower may never have had any intention of ever repaying the loan, and there is a possibility that these companies will be investigated.
What if the director of the company has used the BBL to repay all unsecured creditors (including themselves) and left the company with only the BBL?
Is there a potential preference claim, i.e. the company has preferred its other unsecured creditors over the bank? IPs will need to keep a close eye on this, but will also need to consider the cost and risks of making such claims, and the ability of the directors to repay the monies.
Company accountants and advisors will need to be very careful with the advice that they provide to their clients if the business was in difficulty prior to lockdown, as simply having a BBL could land the directors in hot water.
I am, of course, being somewhat flippant, as I imagine (hope) that the majority of directors who took out a BBL did it with the best intentions and aimed to repay it. After all, the BBLS was put in place to assist businesses struggling with cashflow as a result of COVID.
Post-lockdown trading comes with its own significant difficulties, with potentially lower spending power, lower footfall and social distancing to name just a few, which will inevitably have an impact on trade and are very likely to lead to increased insolvencies.
Directors will have to remember the following:
- If they take the money out of the company, this may result in an overdrawn director’s loan account. A liquidator is likely to try and recover this money for the benefit of creditors.
- If they have taken more than one BBL out in a group unintentionally, they should repay this to the bank as soon as possible.
- If the business was failing or ceased trading prior to taking out the BBL and has not traded since the end of lockdown, it would be best to repay the monies to the bank prior to entering into any insolvency process.
Another question is: What should professional advisors do if they suspect wrongdoing?
By the letter of the law, they should submit a Suspicious Activity Report (SAR).
However, based on what I have said above, this could lead to hundreds, if not thousands, of SARs.
Notwithstanding all of the above, we do also need to take into account the overall long-term intention of the scheme. I believe that it was put in place to try and stimulate the economy by helping people to spend, create trade and preserve or create jobs.
If the money has been used to pay creditors or to buy assets or investments, has there really been any loss, as it has gone back into the economy?
Only time will tell how serious the authorities take these issues, but directors and professional advisors need to be aware of the potential pitfalls of not following due process or providing the right advice.