The bounce back loan scheme was designed to distribute money quickly to businesses that were in desperate need of funds when it was launched in March 2020.
£47 billion of funding was loaned out to over 1.5 million companies. Over 90% of these or £39.7 billion was awarded to small and medium sized businesses with a turnover of £632,000 or below.
To give a sense of scale, one in four UK businesses applied for one of them and as the NAO noted: “The government prioritised payment speed over almost all other aspects of value for money.
Firms with bounce back loans are being stopped from closing - what can they do instead?
The government says that it expects up to 37% or £17 billion of loans would not be repaid either through fraud or because legitimate borrowers would not be able to afford the repayments when they came due.
This is slightly better than the median case scenario outlined in scenarios from HM Treasury in March 2021 that we highlighted in our bounce back loan investigative series published earlier this year.
Under that case the total number of bounce back loan defaults to rise to over 600,000 while £18.6 billion would remain unpaid.
To give an example of the scale of this figure, it is the cost of building 16 Wembley Stadiums!
Additionally, the NAO thinks it has identified approx. 11% or £4.9 billion of funds that have been paid out fraudulently
According to internal estimates the level of fraud is from £3.5 to £4.9 billion but this excludes general dishonesty such as overstating turnover in order to secure a larger initial amount. This refers to newly formed companies or existing businesses used purely to access bounce back loan lending.
At the end of September the British Business Bank found that £2 billion of loans had been repaid set against a further £1.3 billion had been defaulted on.
The NAO found that about 7% or 100,000 of loans were at least one month in arrears and that despite 13 anti-fraud measures being introduced after the scheme’s launch these were “too late to prevent fraud and were instead focused on detection.”
So far only £3 million has been recovered through 33 investigations with a total of 43 arrests.
One factor that hasn’t been discussed in detail is the lending banks forbearance and potential reticence in pursuing outstanding or overdue bounce back loans.
The amounts paid out do have the backstop of being guaranteed by the government but this arrangement has conditions attached including providing evidence that they have made genuine attempts to reclaim outstanding bounce back loan funds.
Although the NAO recognises that different lenders might treat their borrowers differently. There are specific recovery principles set out under the scheme although there is leeway for lenders to follow their “business as usual” approach to debt recovery providing it doesn’t contravene the principles of the scheme.
This means that if a lender's usual approach includes using debt collection agencies then this would be allowed but doorstep visits from bailiffs would not be allowed under the scheme.
When the scheme was first launched there was a lot of discussion around lenders on how the recovery process would operate, foreseeing that it could be problematic in PR terms trying to recover funds from struggling businesses who got into trouble through no fault of their own.
The sheer volume of loans to be administered and recovered led to them exploring setting up a separate body to oversee the process of subcontracting the whole endeavour to UK Finance - the banking trade body - but this was ultimately rejected.
The report also focused on how potential fraud would be handled.
BEIS - The department of Business, Energy and Industrial Strategy - reiterated that their main priority would be pursuing organised crime which was viewed as the highest risk group along with sums of more than £100,000 borrowed.
They note that while some individuals might have acted dishonestly to obtain a loan or dishonestly received one, they would not be a focus for their investigative teams if there are no other fraud indicators present.
The preference is for lenders to pursue unpaid amounts and recovery where feasible.
The Financial Conduct Authority (FCA) wrote to all lenders as their main regulator in July 2021 to remind them of their wider obligations to report fraud but the NAO recognises that as long as borrowers make repayments and the lenders make genuine attempts to recover outstanding debt then there is little they could do further to this.
Chris Horner, insolvency director with Business Rescue Expert said: “The evidence the NAO has seen matches what we’ve been hearing from businesses that have tried to close with an outstanding bounce back loan but have been stopped by HMRC.
“They are treating this as a high priority now so dissolution or striking off is now virtually impossible for a company with these debts outstanding.
“As lenders are being pressured by the government from above to recover more arrears, they will step up their pursuit of companies.
“Combined with HMRC using more compensation orders to make directors and business owners personally liable to repay any outstanding debts of a struck off business, this could be a worrying time - even without the Omicron variant and more potential restrictions on businesses trading in one of the busiest periods of the year.
“We know everybody is busy but taking an hour to get some professional insolvency advice might be the best use of 60 minutes this entire year.
“What they will learn and decide to do with their business might be the difference between being able to look forward to 2022 with some hope and enthusiasm against not being able to visualise any way past current financial difficulties.
“For instance, if a business chooses to close down through liquidation then even if they have outstanding bounce back loan arrears, it will be treated as any other type of unsecured debt.
“Which means if the directors have done their best to keep the company going then it will be allowed to close. The lender would be repaid by the government and the directors can cleanly move onto the next phase of their careers.”
Running a company this year might feel like trying to escape from a maze.
Every time you think you’ve solved your latest problem and you’ve finally turned the corner you’re met with a dead end and you have to find another way.
Sometimes the best thing to do is get in touch with people who’ve helped hundreds of others in the same situation get past their latest obstacle and move forward.
We offer a free initial consultation for any director or business owner who wants one and needs to do something to change their path and quickly.
Once we get a clearer picture of your unique circumstances, we can work with you to create an efficient and effective strategy that could either give your company renewed energy and hope or if you’ve already made the decision you want to move on, help close the company with a minimum of stress, fuss and hassle.
No matter how you see your personal end game, we can help you reach it quicker than you could by yourself.
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.
Legal changes
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.
Personal Liability
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:
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.
Sole Traders
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.
If you are juggling and struggling to make VAT arrears, outstanding tax payments to HMRC or if the end of the furlough scheme has caused you a headache then get in touch with us today.
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.
This week they announced their latest positive sanctions and results against directors who misused Covid-19 financial relief schemes highlighting three cases in which three directors have received bans for collectively misusing £100,000 of bounce back loan funding.
Can a director be made personally liable for company debts including bounce back loans?
The Insolvency Service found that N&S Solutions Ltd, a cleaning services business with one director - Rafael Scher - entered administration in August 2019 with debts of around £150,000 and was later liquidated on June 23 2020.
Upon further investigations they found that the business applied for a bounce back loan of £30,000 on May 15 2020 despite having ceased trading, being insolvent and having no realistic prospect of repayment.
The bounce back loan was used to pay a single trade creditor debt of £29,940 with other creditors being ignored - making this a preferential payment.
Additionally, the company owed £94,000 to HMRC in unpaid taxes which also went unpaid.
Mr Scher was disqualified from acting as a director for nine years as a result of the investigation.
Two directors ran a Nottingham takeaway called Chunky Chicken until they sold it in December 2019.
One of them then improperly applied for a bounce back loan of £50,000 in the name of the business after the sale and used the money to repay a business creditor who was also a relative of the second director.
Both directors applied for personal bankruptcy on May 24 2021 with debts of over £200,000 including the bounce back loan.
They both agreed to sign bankruptcy undertakings extending personal restrictions for eight years - limiting their access to credit and disqualifying them from acting as company directors without express permission from the court.
The landlord of the Royal Oak pub in Nuneaton, Mr Malcolm Wilks, closed it for lockdown at the start of the pandemic in March 2020 and entered into an Individual Voluntary Arrangement (IVA) as a result.
The pub was able to reopen later and traded for a few hours a week until it finally closed for good in November 2020 due to the reintroduction of Covid-19 restrictions.
Mr Wilks received a bounce back loan of £19,000 on November 11 2020 and a day later had his IVA agreement terminated by his supervisor after the Insolvency Service received confirmation that he had only made two of the agreed repayments.
Further investigations revealed that of the bounce back loan only £6,500 was used for legitimate business purposes which was allocated as wages for himself to cover the period when he wasn’t working in the pub.
£1,100 in business rates refunds were also received in December 2020 weeks prior to Mr Wilks declaring bankruptcy with a further £10,500 being received after this date that was also not disclosed to the official receiver.
Mr Wilks signed a bankruptcy restriction undertaking extending the duration of his bankruptcy for a further eight years.
Alan Draycott, the Deputy Official Receiver said: “The Government loan schemes have provided a lifeline to millions of businesses across the UK - helping them to continue trading during the pandemic and protecting millions of jobs.
“As these three cases show, the Insolvency Service will not hesitate to investigate and use our powers against those who abused the Covid-19 support schemes.”
Earlier this week it was confirmed that the government was using more technological solutions to trace possible financial anomalies including Covid related fraud.
AI based systems such as Quantexa are being implemented to scan the vast amounts of data the government, HMRC and the Insolvency Service hold on companies to find discrepancies and investigate them further.
Quantexa CEO Vishal Marria said: “The Covid loan schemes were designed to help the nation at a time of deep economic need, and we are honoured our technology is supporting the government’s tenacious efforts to fight fraud.”
Chris Horner, Insolvency Director with BusinessRescueExpert.co.uk said: “Every director has a duty to ensure their companies maintain proper accounting records.
“In the terms and conditions of the original bounce back loan they took out, it states that it must be for the benefit of the business and never for personal use.
“The Insolvency Service have always made it quite clear that a failure to account for how a bounce back loan was used or using it for personal or preferential payment to creditors could result in disqualification for as long as 15 years.
“If a business undergoes an insolvency procedure such as liquidation - our job as an insolvency practitioner is to produce a report on how the directors acted prior to the event. If there are clear and consistent records, then it makes our job easier because we can see that the money was used for legitimate purposes and we’ll be happy to say so.
“Any business that’s undergoing financial turbulence right now should get some advice because there is a way through it.
If they leave it too late however, it might not end how they want it to.”
With a difficult winter trading period approaching and the Insolvency Service and HMRC stepping up their investigations and enforcement actions, directors and business owners could be forgiven for feeling that they’re under siege.
But help could be closer at hand than they realise.
Once they get a clearer understanding of the situation facing the business, they will be able to work with the directors or owners to draw up an action plan for dealing with creditors and other outstanding financial obstacles.
They might find they have more options than they thought but only if they act quickly and get in touch.
The headline figures that spell out exactly what is required from each party and by when? The clauses that can invalidate the whole deal if not adhered to or, cliche though it might be, the small print?
While they’re all significant - it’s the small print which often trips people up or suddenly makes them realise that a deal they signed is a lot worse or more expensive than what they initially thought they’d signed up for.
Is liquidation possible with a bounce back loan?
We came across a cautionary example recently concerning a company being denied access to its bounce back loan funds that it took out over a year previously.
The business took out a bounce back loan of £50,000 from their lender in May 2020.
Despite being relatively easy to access compared to regular business loans or other kinds of corporate finances, the bounce back loan was not without restrictions and eligibility criteria.
One of the main ones being that loans were linked to and limited by annual turnover.
Specifically businesses were entitled to a bounce back loan amount up to a maximum of 25% of their annual turnover provided this did not exceed £50,000.
So the company directors were surprised when they were contacted in June this year by the lender, 13 months after the loan was granted, to demand further evidence of their annual turnover.
They said that until they received proof they would not permit the company to access any of the remaining bounce back loan money still held in their account.
They also confirmed that if the directors were unwilling or unable to provide the requested information, or if their review of the evidence concluded that the business was ineligible for the loan then they may exercise their right to debit any remaining money from their account for the loan and commence recovery action for any outstanding sum.
In the event, the company was unable to prove that it had a sufficiently high turnover based on their trading figures at the time which were hampered and disrupted by the pandemic and their bank demanded repayment of the loan.
Unable to pay off this amount in full, the borrowing company decided to apply for a regular business loan to raise the necessary amount and then be able to pay it off over a longer period.
The bank not only rejected this application but also withdrew their banking facilities and served notice to close their account fully within 90 days.
This left the directors with no viable way forward and they reluctantly placed the business into a creditors voluntary liquidation.
We’ve previously written about how HMRC are keen to begin recouping outstanding debts including bounce back loan arrears and the forthcoming Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) bill making its way through the House of Lords will grant additional powers to the Insolvency Service to investigate the actions of directors of dissolved businesses within the previous two or more years.
However, the turnover requirement was always one of the more problematic elements of the bounce back loan especially regarding accessing the top up facility if it was needed.
When top ups were first announced in November 2020, they were welcomed as a sensible additional option for companies that had taken some borrowing but not the maximum amount.
They could then use this flexibility if they required it and with further lockdowns being implemented, many did.
What happened was that many businesses were initially turned down for a top up despite meeting the other criteria because of the turnover rule.
Because companies had to rely on the figure they supplied with the initial application, they were not able to reflect the current circumstances facing their business when they applied.
In the initial application rules several banks stipulated that an estimate for the 2019 turnover figure could be used if they didn’t have the exact and verifiable amount available when applying.
And in the top up application conditions it specifically states - the top-ups are only available from a borrower’s existing BBLS lender. A borrower can apply for a top-up that is for the lesser of £50k or 25% of the annual turnover the borrower certified in their original successful BBLS application form minus the value of their original loan.
This obliged the borrower to rely on the original turnover figure quoted when applying for the initial bounce back loan but with no consideration given to any changes in circumstance.
The British Business Bank, which administered the scheme on behalf of the government, inadvertently encouraged businesses to use potentially inaccurate information on their application with the obvious potential for negative consequences further down the line for borrowers as we saw in the earlier example.
Bounce back loan fraud was a real issue that had to be treated seriously but loopholes like relying on an estimated turnover means that many borrowers could find themselves under suspicion through no fault of their own - for not making accurate enough predictions!
Business owners and directors are already facing an uncertain few weeks before Christmas and the New Year without worrying about being asked questions about their bounce back loan.
Especially if it’s already been used for the purposes it was created for - supporting a company and it’s staff under the most trying trading circumstances for decades.
Fortunately we can help alleviate any worries about outstanding bounce back loans, VAT arrears or any other debts they might be concerned about with a simple conversation.
We offer a free initial consultation to discuss their situation and any imminent problems they’re having regarding problem debt or any financial issues affecting their business.
Once we get a fuller picture we can let them know what options they have in the near and longer term and what they can do right now to improve their prospects.
Several businesses who took out bounce back loans last year will be having a similar sinking feeling as the 12 month, payment free holiday period some of them took advantage of has now come to an end.
New research commissioned by lenders who supplied bounce back loans under the scheme found that out of 500 respondents, 83% had asked for or used all available payment holidays they were entitled to.
The lenders also revealed that the most popular request they were getting from borrowers was to add another year long interest free payment deferral.
VAT Arrears are a problem but one that can be managed - find out how
When the bounce back scheme launched in 2020, companies who borrowed were originally given a year free from repayments and also interest free as the government paid the annual 2.5% interest incurred.
Now this period has ended and many are finding it difficult to repay these arrears.
Under the terms of the loan borrowers could request an additional six month interest and repayment holiday and a further three six month interest free holiday periods.
However they would still need to repay the interest which would accrue over this period which could still be a large burden for many of them.
Richard Stevens, chief executive of Momenta who facilitated the research said: “While the government and lenders made available a number of unusually generous repayment options there’s a specific cohort of small and medium sized enterprises (SMEs) who are in the mire.
“Of these businesses struggling to repay, the majority have asked for an extension of the interest free payment holidays for an additional year beyond what has already been offered.
“Of concern is that businesses struggling to repay have requested this complete repayment moratorium over schemes such as Pay As You Grow which is already in place to ease the repayment process.”
He added: “There’s immense financial pressure on business owners from all angles - not least from the slow recovery of sales and the end of the furlough scheme, but the shortage of additional labour due to the onset of Brexit compounded with the increasing costs of certain raw materials and supply shortages.
“From our perspective, it’s these combined reasons which have required additional skilled collections professionals to empathise and negotiate repayment plans, as well as compliance and credit analyst team members to review lending processes.”
Businesses struggling to repay their bounce back loan arrears need to consider their options and then take action according to professional advice, says Chris Horner, Insolvency Director with BusinessRescueExpert.co.uk.
He said: “The bounce back loan scheme is one of the biggest lending ventures we’ve seen in recent years.
“Over £46 billion was borrowed by over 1.5 million businesses across every UK nation, region and industrial sector. We spent the summer detailing most of it.
“But not every business has seen the same recovery. Many have had different restrictions imposed on them through no fault of their own and been unable to trade at the same volume or pace.
“This can make an already tough time even more stressful for directors and business owners who are already juggling with the end of the furlough scheme and other rule changes that could negatively impact them.
“The end of the holiday period for bounce back loan repayments could be critical for a company that doesn’t have a plan in place to handle their liabilities as they come due.
“Getting professional advice right now could be the difference between them trading over Christmas and the new year or not.”
While everybody can be wise after a bad event, business owners and directors of companies with financial worries have the chance to be wise before one - but only if they act now and get in touch with us.
Our free initial consultation is as popular as you’d imagine right now but we still guarantee that one of our expert advisors will listen to your situation and be able to come up with a range of effective and efficient solutions based on the unique circumstances the business faces.
Whether restructuring might be the best option or a CVA or if closing the business down is the logical way to go - even if you have an outstanding bounce back loan - we’ll tell you straight and work with you to complete the process.
The first and most important decision - arranging professional advice - is yours.
Back in the olden days of three or four television channels, just being on the air was a sign that the information could be trusted as relatively accurate.
It’s an issue that the BBC and other traditionally authoritative news sources are grappling with - keeping and attracting audiences while maintaining a reputation for accuracy against sensationalist competitors with less adherence to the accuracy of the information they publish.
It’s a long and roundabout way of saying that some sources are more important than others - the Bank of England for example - and when they speak about the current and future state you can assume they believe what they’re saying.
Is liquidation possible with a bounce back loan?
Last week they released their latest quarterly stability report which contains some stark and striking analysis about the situation facing many small and medium sized businesses adjusting to a tricky and unpredictable Autumn trading period.
According to their findings, the Bank of England now estimates that over a third of the UK’s small businesses are “highly” in debt - more than double the level since pre-Covid trading conditions.
They are also predicting a significant rise in the number of small businesses that could collapse early next year when all restrictions creditor actions including winding up petitions are finally lifted for good.
The Financial Policy Committee said: “Although debt appears affordable in the near term, insolvencies are likely to rise from 2021 Q4 as government support is withdrawn as planned.”
The report highlights that many of these small to medium sized businesses that have amassed unsustainable debt had never borrowed before and some would not have met pre-pandemic lending criteria.
It was only the relatively easy to access schemes such as bounce back loans that enabled them to access the required funding quickly, which was the intended purpose of the scheme.
So it’s ironic that many of the companies that took out bounce back loan borrowing, some being the first business borrowing they’ve ever taken out, are the ones most at risk because of the debts owed on those same loans.
“The increase in debt - though moderate in aggregate - has likely led to increases in the number and scale of more vulnerable businesses.
“As the economy recovers and government support, including restrictions on winding up orders, falls away, business insolvencies are expected to increase from historically low levels.”
The bank said that SME’s accounted for two-thirds of the £79 billion increase in the UK’s corporate debt between the end of 2019 and the first quarter of 2021 as they accessed emergency funding to support themselves with enforced closures and a collapse in trade and trading conditions.
Further analysis shows that a third of SMEs have a debt level more than ten times their cash held in the bank which is up from 14% before the pandemic and subsequent lockdown.
The percentage of those with high debt relative to both cash balances and money coming in also more than tripled during the period from 3% to 10%.
With their official outlook for the economy remaining as “uncertain”, the Bank of England are signalling to businesses both large and small that even if the threat of Covid-19 fades, the outlook will still likely remain turbulent until we’re well into 2022.
The Federation of Small Businesses (FSB) has described the current situation facing their members as a “Sword of Damocles” hanging over them.
They highlight supply chain hold-ups, staffing shortages and tax rises as additional threats to bounce back loan and VAT arrears and are already lobbying the government for help before the Chancellor delivers his autumn budget later this month.
Mike Cherry, national chairman of the FSB, said: “Supply chain problems are hitting hard alongside spiralling employment costs, while the consumer-led recovery could be losing steam.
“Retail businesses are nervous about their peak Christmas season, with an opaque winter Covid plan likely to see trade restrictions installed at just a week’s notice. With a National Insurance hike that could place 50,000 people out of work which could not come at a worse time, it could be a difficult winter ahead.”
While there may be some surprises in the forthcoming budget, many analysts are predicting that businesses need to fasten their seatbelts for a bumpier ride than most were expecting heading into the first relatively unrestricted Christmas trading period for a year.
With energy prices and inflation rising ominously, these are still forbidding shadows compared to the spectres of bounce back loan arrears and other debts that need a response from their borrowers now.
The best response in these situations is usually always to get some professional advice before you decide how you will act.
Our free initial consultation for business owners and directors gives them a chance to highlight their main concerns and worries and let us focus on the most immediate and pressing issues that might menace their companies right now.
Once we have a clearer understanding of their situation, we’ll be able to provide a list of options available to them, which might give them more freedom and choices than they previously believed they had.
But waiting to act will only ensure that the room to maneuver eventually gets tighter until there’s none left at all.
But even we’re surprised by how many inquiries we’ve been getting that centre around one specific question - can a director be held personally liable for a bounce back loan?
So we’ll take the time to do a deep dive into this question and answer it as best we can - because it’s not a strictly yes or no answer.
Private investigations
One reason why we think a lot of directors are becoming more nervous than they need to be about the prospect of being made personally liable for bounce back loan arrears or other debts is due to an imminent law change.
The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill has had a lot of publicity before its legal ascent probably coming before the end of 2021.
The main headlines have been the new power being granted to The Insolvency Service that will allow them to investigate directors of dissolved companies to see if there was any unsavoury activity such as striking off the company while it still had a bounce back loan or other debt.
In these specific circumstances, which could go back several years depending on the investigation, then a director who knowingly breached their legal duties, or should have known, could find themselves in trouble and facing a range of punishments including fines, disqualification of up to 15 years as well as being made personally liable for improperly incurred debt including bounce back loans.
The key point to remember here is that a bounce back loan had a wide-ranging remit for use - to provide an economic benefit to the business during the pandemic.
This criteria could be met in many ways including staff costs and wages, new plant or machinery purchasing, investing in tangible assets or being used to pay down existing debt.
It would also be perfectly legal for a business to have borrowed the lump sum and put it all into a savings account and not spent a penny - as long as they make the agreed repayments when they fall due.
Some directors are worried because they spent the money they borrowed - which was the original purpose! - then they might be in trouble.
As long as they can demonstrate that it was spent on reasonable and legitimate company business, and not on a range of supercars for directors for example, then they will have little to worry about.
If the business is clearly unviable or cannot pay its accrued debts and the only realistic way forward is through liquidation then the bounce back loan will be treated as any other type of unsecured borrowing and will be written off.
Unlike the Coronavirus Business Interruption Loan Scheme (CBILS) where the government guaranteed 80% of the loan and the bank could seek a personal guarantee from directors for the remaining 20%; a bounce back loan was 100% guaranteed.
This meant that even if the business was liquidated and the loan couldn’t be repaid in full, the bank would still be able to claim back its capital providing it could prove it had made a reasonable attempt to reclaim the loan.
In any liquidation, the insolvency practitioner has to provide a report on the directors actions leading up to the insolvency event and will be satisfied if the directors can provide a reasonable and logical explanation, with evidence, for how they used the bounce back loan to support the company.
If they have any questions, they will raise them with directors before submitting the report giving them ample opportunity to put their version of events and iron out any areas of confusion.
Sole Traders
The picture is slightly different when it comes to sole traders as their trading structure doesn’t recognise any legal separation between the company and the individual.
Any debts incurred will fall onto the individual including any bounce back loan debt but an insolvency practitioner will be able to go through any alternative arrangements a sole trader could benefit from including an Individual Voluntary Arrangement (IVA) which could avoid any outright defaults.
Even if a sole trader does default and has to ultimately pay back the sum through other methods the British Business Bank has stated that “no recovery action can be taken over a principal private residence or primary personal vehicle for sole traders that have defaulted on bounce back loans.”
The only other circumstance in which the director of a liquidated company could potentially be made personally liable for a bounce back loan is if it was used to make preferential payments to creditors.
In this scenario, a director would have borrowed and used the loan to refinance existing debts by paying off only those that had been personally guaranteed by them while leaving other liabilities to go unpaid.
As well as being a breach of their director’s duties and obligations, in the event of a subsequent liquidation, this could be seen as a preferential payment and they could ultimately be made personally liable to repay these debts.
A bounce back loan doesn’t have any personal guarantees attached and the bank will ultimately be able to reclaim 100% of the loan from the government in the event of a liquidation and this and other debts being written off.
Also if:
Then there will be no personal liability incurred from the bounce back loan and it will be closed for good as part of the liquidation process.
Bounce back loan arrears are just one area of concern that directors might be focussing on at the moment.
If your business has problems with VAT debt repayments, overdue HMRC arrears, issues with the end of the furlough scheme or other hurdles that seem too high to overcome right now - get in touch with us today.
Our free initial consultation for business owners and directors provides them with the chance to talk to an insolvency professional discreetly and honestly about what they and their business is going through.
Once we get a clearer understanding of the immediate issues and difficulties they’re tackling, we can help them create an effective and efficient strategy, including some actions that can be implemented immediately.
Then we can focus on solutions for the next most immediate and challenging problems while the directors can once again dedicate their time and energy to looking to the future.
Back in March we were one of the first business and insolvency services to identify that bounce back loans arrears would be a sticky battleground for a lot of companies in the weeks and months ahead.
We wrote a series of articles about different areas that businesses needed to be aware of as the first bounce back loan repayments were coming due.
The most popular of which was called “Can I close down my business with an outstanding bounce back loan?”
Well a lot has happened in the past six months so it’s about time we brought the story up to date and see if our answer to that question has changed.
We advised directors and business owners of companies about the various methods and procedures available to them to close their businesses efficiently if that is the only realistic option for them.
The first prescient point we made six months ago was about company dissolutions or strike offs.
We tried to underline how this was only a viable route to closure for businesses that had debts but can realistically clear them within a 12 month window.
Since then, the government became so concerned about businesses using this method to try and close down inappropriately and avoid settling debts with their creditors, that they are creating new legislation to give the Insolvency Service additional powers to tackle this issue.
In the first six months of 2021 alone over 250,000 businesses were struck off the register which is even more remarkable because there was a suspension of voluntary striking off between January and March 2021.
The Insolvency Service are already publicising their recent success in winding up businesses that dishonestly or fraudulently obtained bounce back loans in the previous year.
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.”
Very soon, The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill will specifically give the Insolvency Service a mandate and legal powers to hunt out directors who dissolved their businesses with outstanding debts including bounce back loan arrears.
One of these is the ability to retrospectively investigate their dealings and behaviour leading up to the decision to close in this manner. This is not limited to those closing in 2021 but will span up to two or three years.
The range of punishments include fines, disqualification from sitting as a director for up to 15 years and possibly most damaging, being made personally liable for any debts incurred by the business during this period.
Chris Horner, Insolvency Director with BusinessRescueExpert.co.uk said: “One reason why the government and Insolvency Service are taking decisive action now is because a lot of companies have tried to dissolve their business without good reason.
“We’ve had a lot of recent enquiries from businesses that have had their bank accounts frozen because they have an outstanding bounce back loan balance and have had a strike off notice advertised.
“This is a new development and shows how seriously authorities are taking the issue.
“We’ve been unwavering in our opinion that liquidation - probably creditors voluntary liquidation (CVL) but always entirely dependent on the individual circumstances - is almost certainly the best option for a business with bounce back loan arrears that can’t be repaid but still wants to close down.
“We’ve consistently said, both at the time and even more so now, that the best thing for any director worried about any aspect of investigation, not being able to meet all their obligations when they come due or if they simply want to move onto another phase of their career is to get in touch with us and arrange some impartial, professional advice.”
Six months was always a long period of time but recently it feels even longer.
In March this year we assumed that Covid-19 might be in the mirror behind us and social distancing, masks and lockdowns would firmly be a thing of the past.
We hoped that the economy would be robust and approaching full capacity if not exceeding previous demand as pent-up purchasing passions were unleashed by eager consumers that in turn would buoy businesses and return them to profitability relatively swiftly.
Even struggling businesses would be able to enjoy a modicum of recovery and while some businesses would still close down, they could do this orderly and efficiently.
This might be the scenario in six months time in March 2022, when the restrictions on winding up petitions for under £10,000 or less is lifted, but it might not.
Even if the general economy is on an upward trajectory by then, individual sectors might still be struggling to recover or even having a worse 2021 than 2020 - which seemed unthinkable six months ago.
The one constant than any company director or business owner can rely on is the availability of impartial professional advice.
We continue to offer a free initial consultation to anybody that needs business restructuring assistance or advice on where their company might be heading.
One thing that rarely changes is that the sooner advice is sought and received, the more options and leeway a business has to act.
Leaving things until the last minute is never recommended, especially in the current climate - as it might already be later than you think - although hopefully not too late to make the most important decision and get in touch in the first place.
There are still local spikes here and there all over the UK and as we enter the traditional winter flu season, there might be temporary measures deployed if coronavirus cases rise sufficiently.
The government has also declined to implement planned vaccination passports for people attending large events in England so individuals and businesses could now begin to plan their Autumn activities with more certainty.
Against this backdrop it’s been confirmed that the various remaining pandemic support measures including the coronavirus job retention scheme or furlough will definitely end on September 30th along with a lifting of the ban on winding up petitions.
While it was expected that creditors would be able to seek winding up petitions once again, there’s been a sizable catch - so that now bringing a winding up petition is literally a £10,000 question.
New legislation to be introduced in parliament shortly will:
These measures will remain in place until March 31 2022.
Business Minister Lord Callanan said: “The time is right to lift the insolvency restrictions that were needed during the pandemic.
“At the same time, we know many smaller businesses are rebuilding their balance sheets and reserves, and some will need more time to get back on their feet. These new measures and protections will help them to do that.”
The minister said that businesses should pay their contractual rents where they’re able to do so and also confirmed that existing restrictions will remain in place on commercial landlords from pursuing winding up petitions against limited companies to repay commercial rent arrears built up during the pandemic.
Additionally commercial tenants will continue to be protected from eviction until March 31 2022 while a rent arbitration scheme to deal with commercial rent debts accrued during the pandemic is implemented.
One measure not time bound by restrictions are new legal powers given to the Insolvency Service which allow them to retrospectively investigate the conduct of directors of dissolved companies.
If they can prove that directors were dishonest or culpable in behaviour which led to their company’s failure then as well as being made personally liable for any debts incurred, they can be disqualified from acting as a director for up to 15 years.
This includes bounce back loans so obtaining professional advice is critical if you’re thinking of closing your business.
Chris Horner, Insolvency Director with BusinessRescueExpert.co.uk said: “The new £10,000 threshold for winding up petitions sounds like a big increase from the previous minimum level of £750.
"But in reality, due to the associated expense in issuing winding-up petitions, the vast majority of pre-COVID winding-up petitions were over the new level in any event.
“Eager creditors will examine their options carefully and look to use whatever leverage they have.
“Hopefully, many companies use the new 21 day period to negotiate sensible repayment plans. Seek expert help if in doubt about how best to approach this.
“Like the insolvency moratorium that’s automatically granted if a company goes into administration, this provides valuable breathing space and time for a business to come up with plans to deal with problematic debt.
“This includes outstanding bounce back loans or VAT arrears - they haven’t been suspended - and a business can still close down, even if a company has these debts but only if it’s done using the right method overseen by an insolvency professional.
“For example, If a business with unsustainable debt wanted to close and started the process in the next couple of weeks - it could probably be concluded before Christmas, leaving the directors or owners free to begin a new venture or career in 2022.”
Why you should pay to liquidate your business
Time is only an asset if it’s used effectively.
The 21-day negotiation period of winding up petition restrictions and £10,000 floor is only useful if you take advantage and get professional advice now because it will, like all the others, cease eventually.
We offer a free initial consultation to any business owner or director who wants to know the best way to close their company or if possible, restructure and keep it alive, even if it has debts.
Once we get a better understanding of the situation, we can come up with a tailored solution possibly with more options and choices than you thought you had.
But this is only possible if you use your agency and get in touch.
For instance, it’s common sense for builders, scaffolders and cement pourers to be classed together under construction but what about a travel agent and a security guard?
Or a car leasing company and a landscape gardener? Or an employment agency and a bouncy castle hire business?
They all come under the seemingly disparate title of administrative and support businesses which is a broad umbrella title that covers amongst others:
So now we know which sort of businesses we’re talking about - how did they collectively manage during the year of lockdowns and afterwards?
Less is more
The initial figures show that in the year leading up to the first lockdown being implemented - Mar 2019 to Feb 2020 - there were 1,798 insolvencies involving businesses in the administrative and support sector.
The immediate 12 months afterwards - Mar 2020 to Feb 2021 - saw 1,421 administrative companies close.
Although this is 377 less, it’s still larger than might have been expected considering the temporary halt on creditor actions like winding up petitions and the range of additional support made available to businesses over the past 18 months.
1,421 is a larger number than the losses reported by the hospitality and retail sectors, which were most popularly believed to be the worst affected in the pandemic with 1,378 hospitality companies and 1,355 businesses in the retail sector becoming insolvent.
According to official statistics supplied by the Insolvency Service, there have been an additional 358 insolvencies in the administrative sector since March this year which takes the total number since lockdown to 1,779 - which is 118 a month or 29 a week shutting their doors.
Did bounce back loans soften the blow?
The coronavirus jobs retention scheme or furlough, did help a lot of administrative businesses keep staff rather than forcing them to be made redundant.
As the travel industry ground to a halt and nightclubs and other sectors that would usually require security staff didn’t need them, administrative businesses with no income needed support and quickly.
The bounce back loan scheme and CBILS was rolled out for just such a purpose and these companies made use of it.
The number of loans taken out by administrative services was 102,946 - more than the collective borrowing of the manufacturing, real estate and transportation business sectors.
The total amount borrowed was £3 billion, which is an average borrowing amount of £29,141 per company.
Under the most conservative official estimates, it’s expected that 15% of the total lent to the industry would remain uncollected would be £450 million but if the default rate rose to even 40% then this figure would also grow to £1.2 billion.
You can still close your company even if you have bounce back loan arrears - find out how
Since pandemic restrictions began to be lifted, administrative businesses can begin trading again and supplying their valuable services to customers but there are storm clouds gathering on the horizon.
The furlough scheme is finally being wound up at the end of September which means businesses either have to bring their furloughed workers back on full pay or implement redundancies.
Any bounce back loan or CBILS arrears will continue to grow if they’re not being paid and any outstanding VAT arrears from their suspension in 2020 are now due too.
Creditors will also be able to begin to take action to reclaim unpaid debts from September 30th too, allowing them to seek statutory demands and winding up petitions if not paid within 21 days of receipt.
Chris Horner, Insolvency Director with BusinessRescueExpert.co.uk said: “Administrative businesses have had one of the worst hands dealt to them during the pandemic and lockdown.
“A lot of them didn’t qualify for any support other than bounce back loans and repaying these could become one of the biggest challenges businesses face this and next year if they aren’t able to trade like they did before.
“The travel industry is still in flux to put it mildly, hospitality and nightclubs are just reopening but will need to comply with new rules and regulations shortly with little guidance being given to their security on how they will be implemented.
“The shakeup in the commercial property sector will have big knock on effects for cleaning and landscaping businesses that service them so will make their financial forecasting nearly impossible to predict too.
“One thing administrative and service businesses can do is adapt and adapt quickly so they can use their talent and experience to take advantage of the little time left before September 30th and get some professional advice on how they can help themselves before so many rules change.
“A recovery strategy can work but only if it’s created and implemented now. This can include managing any unsustainable debt including bounce back loan arrears, VAT arrears or CBILS.”
A lot of people thought that by the end of September 2021, if not business as usual, we’d be at a stage of business getting back to usual.
But for many companies and sectors - especially administrative and support businesses - it really isn’t.
Debts have increased, more are appearing and the last protections from creditors are days away from being removed.
There could still be a practical way forward for a business in this position but only if they take the first step and get in touch to arrange some practical, professional advice.
We offer directors and business owners a free, initial consultation to set out their position and once we get a full understanding of the issues we face, we can work with them to create a strategy to meet and defeat these challenges.
But get in touch today because after September 30th, the choices might be harder still.
