Are the rules different for them?
More than a few Scottish businesses are getting in touch with us to ask if directors or their owners can be held liable for bounce back loan debt.
It entirely depends on their circumstances so we’ll break these down so you can get a clearer picture if this could apply to you.
One of the reasons why directors and owners of business in Scotland and elsewhere are becoming more wary or nervous about bounce back loan arrears is because of an imminent change to the law.
The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill has been well publicised and is currently making its way through the House of Lords. This means that legal ascent could be granted before the end of 2021 or early 2022 at the latest.
It will bring several changes to existing rules but the one that is getting the most attention revolves around a new power being granted to the Insolvency Service and their likelihood to use it.
Once the bill passes, the Insolvency Service will be legally allowed to investigate the directors of struck off or dissolved companies, which they currently can’t do, to see if there was any illegal or improper activity involved.
This includes striking off a business that was known to have existing bounce back loan arrears or other debt
Under the retrospective terms of the new law, they can go back several years depending on the circumstances of the investigation.
Any director associated with these companies who knowingly, or who realistically should have known they were breaching their legal duties by allowing the business to be dissolved while still having outstanding debts could find themselves in hot water.
The available punishments range from fines, being disqualified from holding a directors position for up to 15 years and being made personally liable for any debt that should have been paid off before the company was closed in this manner – including bounce back loan arrears.
It’s important to remember that while the Accountant in Bankruptcy (AiB)of the Scottish government remains responsible for administering the process of personal bankruptcies and recording corporate insolvencies in Scotland, the Insolvency Service oversees UK-wide insolvency policy.
The latest quarterly statistics bulletin published by the AiB showed that the number of Scottish corporate insolvencies between July and September 2021 rose by 29.4% compared to the previous quarter and by 80.3% compared to the same period a year ago.
This shows that many businesses in Scotland are choosing to close down through liquidation or having no realistic alternative.
Another reason why bounce back loans were so attractive to businesses was that they didn’t require any personal guarantees or other personal charges attached as a borrowing condition.
Because they were 100% guaranteed by the government in the event of liquidation, the lenders’ liability was removed although there are other conditions that have to be met in order for them to reclaim their full lending amount including:
- The initial application and any subsequent top up amounts were legal and correct at the time
- The financial position of the company and other factual statements were accurate and not artificially inflated in order to obtain the loan
- The business was already operating as a going concern at the time of the application and not created purely in order to obtain funding
- The bounce back loan and other lending was used according to the terms of the agreement and spent on legitimate expenses or business purposes
- The directors acted in good faith at all times and didn’t breach any of their legal duties or obligations
If all of these conditions are met then there will be no personal liability incurred from the bounce back loan and more importantly, it will be written off as part of the liquidation process.
We conducted some research earlier in the year to look at how each UK nation and region compared in their demand for bounce back loans and the Scottish scene was mixed.
A total of 86,062 businesses in Scotland took out a bounce back loan, borrowing a collective total of £2.5 billion under the scheme.
This is approximately 23% of all Scottish businesses and the average amount per company is a not inconsiderable £29,048.
Various official sources projected how much would remain unrecovered depending on the future viability of borrowers to continue trading, make a profit and repay the bounce back loan and it was estimated that between £375 million or even up to £1.5 billion would be lost depending how many eventually became insolvent.
One of the reasons for the popularity of the bounce back loan in Scotland and further afield was due to its versatility.
Unlike other, more restrictive kinds of borrowing, it had a wide remit to be used “to provide an economic benefit to the business during the pandemic”.
Now this could be interpreted in many different ways including being spent on wages or other staff costs (not including the furlough which was through the Coronavirus Jobs Retention Scheme).
It could be used equally validly to purchase new machinery, plant, equipment or training. It could be used to invest in stock, supplies or other tangible assets or could be used to pay off any existing and more onerous debt as the repayments are capped at a relatively low 2% per annum.
A business need not spend any of the loan amount – it would have been perfectly legal for a business to borrow as much as they were legally entitled to and put it in a savings account – as long as they were able to meet repayments when they became due.
The loan could also be deferred once for a six month holiday period at the beginning and with subsequent interest breaks throughout its ten year lifespan.
Despite some businesses having issues with their lender regarding the turnover figure used to qualify for the original loan, some directors we’re speaking to are worried because they spent the money they had borrowed.
We can reassure them and you that if a director or business owner can demonstrate the bounce back loan was spent on legitimate and reasonable company business – not on a new Bentley for the CEO for example – then they have little to worry about if they are making the required repayments.
In the event of insolvency – if the business has no clear way to repay its accrued debts and it has no alternative but to close down through a liquidation process – then the bounce back loan is treated as any other kind of unsecured borrowing and will be written off as part of the procedure along with other debts.
Unlike its sister program the Coronavirus Business Interruption Loan Scheme (CBILS), a bounce back loan was 100% guaranteed by the government.
Under CBILS, 80% of the total loan was guaranteed and lenders could ask for a personal guarantee from directors for the remaining 20%.
The guarantee means that even if the business goes into liquidation and the loan wouldn’t be repaid, the lender would still be able to claim back 100% of its capital – providing it could demonstrate that it had made reasonable attempts to reclaim the loan before this.
The insolvency practitioner also has to provide a report on directors actions to the Insolvency Service in a liquidation to help establish a timeline of what they did and when.
The Insolvency Service takes these reports seriously and uses them as the basis for any potential disciplinary and legal action against directors judged to have acted improperly.
They’re also a good way to set out that the directors did everything required of them in the circumstances to help the business and any evidence or reasonable explanations for decisions can be made here to build the narrative including how the bounce back loan was used.
If the practitioner has any additional questions or queries about events then they will raise them at this stage before submitting the report giving the directors a lot of time and opportunity to put their version of events and clear up any areas of potential confusion.
Things are slightly different if you’re a sole trader in Scotland or other parts of the UK.
Whereas a limited company has a separate legal structure from the directors or owners, a sole trader doesn’t have any such separation when it comes to their finances.
This means that any of the incurred debts of the business will fall onto the owner including bounce back loan debt.
There are alternative arrangements a Scottish sole trader in difficulties could explore including an Individual Voluntary Arrangement (IVA) which would avoid any outright defaults but an insolvency practitioner will be able to explain what else they can do.
Businesses in Scotland have never seen similar trading conditions in the past 18 months affecting so many sectors so severely and simultaneously.
And while Scots are renowned for their friendliness and hospitality, these are businesses not charities and have to make a profit in order to meet their obligations, pay staff and ultimately prosper.
Outstanding bounce back loans and other arrears will concern directors and business owners right now if they haven’t returned to trading at full capacity – and few will.
We provide a free initial consultation for business owners and directors where we can help you examine the issues your business faces.
Working together, we can plan an efficient and effective pathway back to profitability if it can be done – or look at realistic alternatives if it can’t.
No matter what business issues might be keeping you awake at night, sharing them with an insolvency professional will feel like a weight being lifted.