Bounce Back Loans – 20% of borrowers are asking for more time to pay
Will Bounce Back Loan Repayments Tip Some Companies into Insolvency?
Of the 1.5 million small businesses who took out Bounce Back Loans from May 2021, due to Covid-19 disruption, it is estimated that c.20% of them (approx. 300,000) have already asked their banks for more time to repay, now that the first repayments are falling due. Most of these have asked to extend the repayment term from 6 to 10 years. This is the first indication of how well businesses are faring as restrictions are easing and commerce begins to return to some sort of post Covid-19 normality. Only time will tell how many of that 300,000 are really struggling. However, with support beginning to wind down, and repayments now due, we ask some key questions:
- What happens if a company cannot recover from the problems caused by Covid-19 (even with the BBL), and must enter a formal insolvency procedure, such as a Creditors’ Voluntary Liquidation?
- Is liability for the BBL with the company or the director?
- What about the threat of director disqualification?
- And how can Insolvency Practitioners help distressed businesses?
What happens to a BBL if a business is unable to recover from the impact of Covid-19?
If a business becomes insolvent, having been unable to recover from the impact of Covid-19, and cannot repay its BBL, responsibility for repaying the loan lies with the company and not the directors or other shareholders. This is providing the directors comply with their statutory and fiduciary duties, and the loan has been used in accordance with its terms and conditions.
Our comment at Antony Batty & Company is that:
“It is important for directors to be aware of these BBL and directors’ duties compliance provisions, because if these are breached, that is when directors could face personal liability for repayment of a BBL and possibly face a director disqualification investigation.”
In addition, the current temporary suspension of Wrongful Trading does not protect directors from all liabilities.
What about the relaxation of Wrongful Trading?
The extension of wrongful trading provisions to 30th June 2021 is intended to reduce the numbers of businesses heading for liquidation, giving those that need it a breathing space to trade through the difficulties caused by the Pandemic. It allows directors to continue to trade even if their company is at risk of insolvency without the threat of being personally liable for the business’s debts, including outstanding BBLs.
However, the rules surrounding preference payments and misfeasance have not been relaxed, meaning directors could still be liable for repayment of the BBL if they fall foul of these two areas.
Hot tubs, new cars and overseas properties. What about the possibility of a director disqualification investigation?
The Company Directors Disqualification Act (CDDA) of 1986 details the procedures that the Insolvency Service and Liquidators use to investigate and subsequently disqualify directors of failed (insolvent) companies of misconduct.
The duties of directors fall into 4 main categories: Administrative, Fiduciary, Trading and Financial and clearly if a BBL has been used incorrectly or even fraudulently, and the company then becomes insolvent and goes into liquidation, then that is when a director disqualification investigation looms.
A key question is whether Directors should be automatically held liable if a business fails after a loan is obtained. We are now seeing an increasing number of insolvency cases where BBLs have been taken and the focus is on how the funds were then used in the business.
Our team points out:
“We have been asked if Directors who have blatantly abused the loans will be held to account for using the funds pay off their mortgage and to buy such things as hot tubs, new cars and even overseas properties. The answer is yes. BBLs cannot be used for these fraudulent purposes. The time will come for such delinquent directors to be investigated and held to account, with director disqualification and criminal proceedings both possibilities.”
However, in the case of responsible Directors, who had to make difficult decisions in the exceptional and uncertain circumstances created by Covid-19 (and ultimately could not quite avoid insolvency), we believe they should not fear the prospects of a formal insolvency and the possibility of director disqualification.
How can insolvency practitioners help?
Our first aim is always to see if we can turn a struggling business around and help it recover. R3, our industry body, points out that over 40% of businesses that engage the services of an Insolvency Practitioner avoid a formal insolvency procedure.
The earlier we are engaged, the more likely we are to be able to turn a business around, whether that be though access to more and better funding, restructuring or other procedures such as an Administration or a Company Voluntary Arrangement.
In addition, we are always here to help and advise on how to avoid becoming personally liable for the repayment of loans, including BBLs. To reduce the chance of being investigated for Wrongful Trading and becoming personally liable for a company’s debts, directors should:
- Proceed with caution if they notice that their company is having financial difficulties.
- Quickly raise concerns about the company’s finances with their accountants or fellow directors.
- Seek advice from a professional, such as an insolvency practitioner, as soon as possible, to limit their personal liability if insolvency does strike. This will help to prove that they were acting in the best interests of the company by seeking advice.
- Make sure that all decisions that are made throughout any period of financial difficulty are properly documented and that regular board meetings are held with issued minutes. These are always asked for in an investigation and if they are not there or properly documented, it does not look good.
Talk to us if you are worried about repayments of BBLs and Personal Liability
Given the financial shock that the pandemic has given many thousands of businesses, the likelihood is that the beginning of BBL repayments could push some over the edge. In addition, the end of the suspension of Wrongful Trading on June 30th, means we will likely see a sharp increase in directors being investigated for it at insolvency, pointing towards an increase in personal liability for directors of failed companies.
If you are concerned about the financial position of your company and are facing insolvency, especially if you are struggling to repay a BBL or would like to discuss personal liability due to wrongful trading further, please contact us or call one of our offices:
Also K&W Recovery, trading as Antony Batty and Company, Thames Valley: