Fifty Shades of Grey – Directors and Bounce Back Loans
We need to cast our minds back to 2020 and the first lockdown when the government introduced Bounce Back Loans to businesses struggling with the effects of the Covid 19 pandemic. It is difficult to remember, but at the time no one knew when the lockdown would end or what the economy would look like when it did. Businesses took their Bounce Back Loans and used them as lifelines to see them through until hopefully better days. This was often with the attitude of paying their employees and keeping their businesses alive rather than for any strategic purposes.
Now of course we have the benefit of hindsight and many directors are wondering what to do with a business that has benefitted from a Bounce Back Loan that it cannot repay. This in itself is no surprise; over 1.5 million loans were made totalling more than £47 billion.
The loans were intended to allow companies to bounce back from the negative financial consequences of the lockdowns brought about by the covid-19 pandemic. Interest was not payable for the first twelve months and the loans were to be repaid within 6 years (subsequently increased to 10 years).
The government has already confirmed that they have effectively written off £6.9 billion as having been obtained fraudulently and believed to be unrecoverable; that still leaves some £40 billion being collected and believed to be collectable within the next nine years.
Many loans will of course have been made to businesses which either have been unable or will be unable to survive and which will need to enter into a formal insolvency process. The conduct of the directors or owners of those businesses will, the government have stated, be scrutinised by the respective appointed insolvency practitioners and any misapplication or misappropriation of BBL funds will be reported and / or pursued, as appropriate.
What does that mean in practice?
It is worth firstly reminding ourselves of the duties of a director (or indeed former or shadow directors). The general duties are based on common law rules and equitable principles and the key elements, as detailed in sections 170 – 177 of the Companies Act 2006, include:
- 171 Duty to act within powers
- 172 Duty to promote the success of the company
- 174 Duty to exercise reasonable care, skill and diligence
- 175 Duty to avoid conflicts of interest
- 212 Summary remedy against delinquent directors, liquidators, etc
- 213 Fraudulent trading
- 214 Wrongful trading
- 238 Transactions at an undervalue
- 239 Preferences
- 423 Transactions defrauding creditors
To find out more here
The powers of an insolvency office holder
An insolvency office holder has, as you would expect, significant powers which include the following:
- Where any person has in his possession or control any property, books, papers or records to which the company appears to be entitled, the court may require that person forthwith (or within such period as the court may direct) to pay, deliver, convey, surrender or transfer the property, books, papers or records to the office-holder.
- Any person who is or have at any time been officers of the company or those who have taken part in the formation of the company at any time within one year before the effective date or those who are in the employment of the company, or have been in its employment (including employment under a contract for services) within that year, and are in the office-holder’s opinion capable of giving information which he requires, shall give to the office-holder such information concerning the company and its promotion, formation, business, dealings, affairs or property as the office-holder may at any time after the effective date reasonably require, and attend on the office-holder at such times as the latter may reasonably require.
- The court may, on the application of the office-holder, summon to appear before it any officer of the company, any person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or any person whom the court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company. The court may require any such person as mentioned above to submit to the court an account of his dealings with the company or to produce any books, papers or other records in his possession or under his control relating to the company. To find out more here
A grey area
Getting back to the subject of this piece, as you will have gathered from the above, the review of the conduct of a director whose company is unable to repay a Bounce Back Loan is far from straightforward and certainly not black and white – hence the irresistible title.
What is deemed abuse and or misuse of the loans? Apart from the obvious cases of fraud, if the loan was not used for the benefit of the business, it will be reclaimable by an office holder from whoever benefitted from its use. Anything else, I would suggest, is a shade of grey rather than black or white.
So a director using loan monies to build or upgrade their home office or to replace their car is, I would suggest, a misuse of the funds, although this is by no means cut and dried and each situation will need to be judged on its merits – it is one thing to replace an old car with 150,000 miles on the clock with a cheap model with 70,000 miles and quite another to spend the whole loan on a new sports car.
The following individual scenarios are even more opaque:
- Loan monies have been used to pay salaries to directors
- The company has stopped trading with its creditors being minimal other than the Bounce Back Loan
- There was never any intention to repay the Loan
- The company was insolvent before it applied for the Loan
- The company became insolvent soon after the Loan was received
- The Loan monies were used to repay directors’ loan accounts
- The Loan repaid an existing loan which was subject to a personal guarantee
Any one of these scenarios may be a breach of a director’s fiduciary responsibilities or may be absolutely fine, depending on the individual circumstances. The government appears to want insolvency office holders to be the arbiters of what is right and what is wrong in each instance and it seems that the only solution for directors in this position is to take advice from a licensed insolvency practitioner.
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