What directors need to know
The bounce back loan scheme was a success for many of the businesses who took them out.
They helped them to keep trading or to support themselves and their employees whilst locked down and unable to function normally.
The final official borrowing figures released by the government earlier this year showed that over 1.5 million bounce back loans had been granted for a total of £47 billion – all guaranteed by the government.
Over 44,000 north east businesses took part in the scheme, borrowing an average of £26,751 each or £1.2 billion collectively – an amount equivalent to the cost of building fifty brand new stadiums the size of Sunderland’s Stadium of Light.
27.5% of north east businesses, over one in four, applied for bounce back loan financing, which was the highest demand in the country. The average amount loaned however was the lowest amount – some £7,000 less on average than a London-based business which saves an average borrowing figure of £33,480 per loan – the highest average amount in the country.
Earlier this year, BusinessRescueExpert.co.uk conducted an investigation into the risk of defaults around bounce back loan borrowing done by businesses.
In the North East they found that even under the official best-case scenario, approx. 15% of loans would remain uncollected. That would be 6,729 in our region – with a total of £180 million remaining unpaid.
At around the same time we published our results, the Department of Business, Energy and Industrial Strategy (BEIS) announced that they would begin to enforce bounce back loan debt recovery imminently but carefully.
Business Secretary Kwasi Kwarteng wrote that: “HMRC would adopt a cautious approach to enforcement of debt owed to government that will have accrued” and that HMRC would soon update its enforcement methods so that any outstanding debt could be brought into managed arrangements for businesses affected by the pandemic and subsequent lockdowns.
Specifically he said that using insolvency to enforce payment would remain a last resort and that he recognised that “the path back to full trading will be difficult for many companies, particularly those with accrued debt and low cash reserves.”
If BEIS are playing the good cop in this scenario then the Insolvency Service are playing the bad cop – promoting their recent successful attempts to wind up several limited companies that had been involved in fraudulent activity including dishonestly obtaining bounce back loans.
Dave Elliott, Chief Investigator at the Insolvency Service said: “The bounce back loan scheme was made available to help support businesses during the pandemic.
“It’s outrageous that some directors have been trying to abuse this support, and the action we have taken shows we take this issue extremely seriously.”
Despite the tough talk, just how seriously are the authorities cracking down on bad bounce back loan behaviour by directors and business owners?
One growing trend we’ve noticed recently in the north east and elsewhere is where companies with outstanding bounce back loan arrears are attempting to dissolve their businesses, or have them struck off.
Company dissolution is a perfectly legal method of closing a company but comes with a set of strict conditions.
Dissolution is not an available tool if the company owes any money, including outstanding tax or a bounce back loan
New legislation, specifically aimed at unscrupulous directors, is due to become law later this year (but will apply retrospectively) and will be a big problem for those who’ve tried to close their company this way and avoid their legal responsibilities.
The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill 2021 will allow the Insolvency Service to specifically target and pursue directors who close their companies by dissolving their businesses when they have outstanding debts.
One of the main new measures will see the Insolvency Service given retrospective powers to investigate directors of struck off companies and how they acted in the circumstances leading up to the dissolution.
Being retrospective, directors of north east businesses dissolved not only in 2021 but within the past couple of years can expect to be contacted in the near future if they had bounce back loans or tax debt..
Directors of businesses with outstanding bounce back loan debts trying to dissolve their business from now on can reasonably expect to receive an “Objection to Company Strike Off Notice”.
This prevents the company from being struck off and will also be an invitation for any of their other creditors to register their objections to the striking off as well.
Disqualification and fines
No system is 100% perfect so occasionally a business with outstanding debts slips through the net and is struck off.
What are the likely consequences facing directors who have managed to get their businesses struck off with bounce back loan arrears?
In the first instance the Insolvency Service will be looking to disqualify any directors of companies who have allowed their business to be struck off when it has debt.
The disqualifications will be for up to 15 years depending on the circumstances. The directors will also be personally liable for fines and any costs incurred.
State of play
So now you’ve got a better idea of what could happen – we thought we’d go one step further and find out what’s actually going on with dissolution objections right now.
Businessrescueexpert.co.uk lodged an FOI inquiry with BEIS earlier this month to ask if they are actively filing objections with Companies House against businesses with outstanding bounce back loans that are looking to be struck off.
We also asked on what legal basis these objections were being lodged under.
BEIS confirmed that it is filing objections where “a strike off notice has been issued against a company which has an outstanding bounce back loan”.
Liquidation – a proper alternative to striking off
Now we have official confirmation that dissolutions are being officially objected to – with the consequences we’ve outlined – what can worried north east directors do?
Bounce back loan repayments are falling due, and the last support measures and protections against creditor actions are being removed within weeks.
All of this adds increased pressure to cash flows that are already squeezed to the limit as they try to manage all the outgoings with reduced income – if they’re able to trade without restriction once again.
If a business is genuinely unable to meet all of its obligations and liabilities including bounce back loan arrears then there is still one legal insolvency process they can follow that would allow them to close their company, settle their debts and move on to the next chapter of their career efficiently and effectively.
Company liquidation, or specifically a creditors voluntary liquidation (CVL), is the best route for a business with outstanding debts including unpaid bounce back loans, to follow.
Once they’ve engaged a licensed insolvency practitioner, they will immediately take over all dealings with creditors and work through the rest of a businesses debts to compile a full picture of who is owed and how much.
What happens in the North East is happening all over the country
Chris Horner, insolvency director with Businessrescueexpert.co.uk, said: “Our FOI inquiry has proven that HMRC are treating improperly dissolved and dissolving companies as their highest priority, which should effectively close off this avenue for directors looking to close down their businesses.
“We can expect to see more compensation orders being used to make directors personally liable for the debts of their struck off businesses if the Insolvency Service believe they’ve been done incorrectly or to evade oversight.
“Another common misunderstanding about bounce back loans is that because they are underpinned by government guarantee, they won’t be chased by lenders. They will.
“The lender will try to secure repayment for at least 12 months as standard as a condition of reimbursement because they will have to show the government they tried to recover the funds they lent.
“They probably won’t start insolvency proceedings just for bounce back loan debt but when restrictions are lifted at the end of September they could use debt collectors and bailiffs to enforce repayment.
“If a business chooses to liquidate instead then the bounce back loan will be treated as any other unsecured debt and if the directors have fulfilled their duties to the best of their abilities, then the lender will ultimately be repaid by the government.
“The most important thing any business in the north east or anywhere else that’s having difficulties repaying any debts, including bounce back loans, can do right now is to get professional insolvency advice.
“The rules literally change at the end of September so if they use this time constructively to protect themselves and their business financially and legally, they could already have moved onto their next venture by the time this happens.”