Everything directors need to know

Specifically because the repayments from this and other Covid-19 support measures are coming due this year – if they haven’t already – and there is some confusion for businesses looking to close down about how seriously or not this outstanding debt is being treated. 

A recent example of the confusion is a letter that the Business Secretary Kwasi Kwarteng sent in a letter to business leaders this week. 

In the letter, he said that HMRC would take a “cautious approach” with companies that were trying to reopen post lockdown and pay down their debt appropriately. 

Specifically replying to concerns raised by R3, the insolvency trade body and the Institute of Directors that urged HMRC to help businesses in danger of becoming insolvent due to a combination of issues including:

  • A stay on creditor actions including statutory demands and winding up petitions has been extended until September 30 – where they relate to the pandemic. Debts incurred before March 30th 2020 could theoretically be pursued 
  • Until September 30th, any businesses that have previously entered administration, a company voluntary arrangement (CVA) or any other insolvency procedure in the previous 12 months will be able to enter an insolvency moratorium
  • The commercial rent and eviction moratorium has also been extended to March 30th 2022
  • Companies with employees on furlough as part of CJRS will have to pay 10% of their wages from July 1st and 20% from August 1st until the end of September when the scheme is scheduled to end

Kwarteng wrote that HMRC would “adopt a cautious approach to enforcement of debt owed to government that will have accrued” and said 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. 

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.”

Does your business need to worry about bounce back loan fraud?

This is in contrast to news published by The Insolvency Service in the same week highlighting their success in petitioning courts to wind up five limited companies since this year that had been involved in fraudulent activity involving bounce back loans and CBILS borrowing. 

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.”

The new Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, currently before Parliament, will give the Insolvency Service additional powers to investigate and disqualify directors of companies which fraudulently claimed bounce back loans but were then subsequently dissolved. 

The investigative power will be retrospective to look at conduct that took place before the law came into place and if wrongdoing or malpractice is found, the sanctions can include a ban of up to 15 years or even criminal prosecution for serious offences uncovered. 

Get some professional advice before the approach changes for the worst

Chris Horner, Insolvency Director with BusinessRescueExpert, thinks that while it’s useful for HMRC and the Insolvency Service to remind directors and business owners about their responsibilities, the mixed messaging might cause unnecessary confusion.

He said: “From the conversations we’ve been having within the industry and examples we’ve seen it’s apparent that the Insolvency Service are directly targeting abuse of the bounce back loan scheme, CBILS and furlough fraud as their highest priority this summer.  

“They will specifically be looking at businesses with bounce back loans who have tried to use the route of dissolution or striking off to close their business down instead of using a more appropriate liquidation procedure. 

“In these circumstances it wouldn’t be surprising to see them seeking compensation orders to make directors personally liable for these debts if they have closed their business incorrectly in the eyes of the Insolvency Service. 

“Recovery action on defaulted payments will be pursued for at least 12 months as standard and even though lenders will be repaid under government guarantee for bounce back loans for example, they are still required to continue any recovery action. 

“They will probably avoid initiating insolvency proceedings just for bounce back loan debt by itself but will continue with debt collection measures including using debt collectors or bailiffs. 

“We can also clarify that any personal guarantees given against bounce back loan debt specifically are unenforceable and these debts cannot be sold on to other collectors. They will remain the responsibility of the original lender to collect. 

“Another thing bounce back loan borrowers need to remember is that even if they have obtained a payment holiday from their first repayments, interest continues to accrue during the payment holiday.  

“If a business with bounce back loan borrowing is contemplating liquidation, which it can do, it will be treated like any other creditor and should not be paid over and above agreed repayment terms. 

“This also includes if the funds are being held as cash in their bank account. They should not use this to repay the lender ahead of other creditors as in the event of insolvency it would be treated as a preferential payment.”

If your business has taken out a bounce back loan or CBILS borrowing in the past 18 months and you’re worried about repayments or if you think your best option is to close your company but don’t know how to deal with these specific debts then get in touch with us today.

We offer a free initial consultation for business owners and directors to discuss their situation and we’ll work with them to come up with the most efficient and effective plan to reach their goals. 

As it continues to be a challenging environment for companies and will remain so for the rest of the year and possibly beyond, so taking the time to fix any financial difficulties facing your business right now could be the best time investment you make in 2021.