What happens if you can’t pay back Covid-19 Loans and What About Loan Fraud?

We look at this area from the perspective of an Insolvency Practitioner

The Covid-19 pandemic has seen huge levels of Government backed loans (the Coronavirus Business Interruption Loan Scheme – CBILS, the Coronavirus Large Business Interruption Loan Scheme – CLBILS and Bounce Back Loans – BBLs). This support has helped many thousands of businesses keep going throughout 3 lockdowns, but what happens when a business cannot pay back its Covid loan? And what about solvent companies that have fraudulently applied for and received a Covid loan? In this article we look briefly at each area, from the perspective of the insolvency practitioner. But first we look at the scale of the Government’s support.

What is the scale of Covid-19 loan support?

Treasury figures up to the end of December 2020 show the scale of the Government’s support.

In November 2020, the Office for Budget Responsibility said that it expected a total of up to £87 billion of business borrowing to be backed by Government guarantees, with the majority being in Bounce Back Loans.

These are huge numbers, but the National Audit Office has warned that £26billion could be lost to loan fraud, which makes it a huge problem for the country.

What happens to companies that cannot repay their Covid loans?

In recent articles we have reported how important it is for insolvent companies to fulfil their duties as directors. If an insolvent company is liquidated and the liquidators have reason to believe that the directors have misused company funds – and that includes Covid loans – then they have a statutory duty to investigate (usually through the Insolvency Service).

If directors are found to have breached their fiduciary duties (under sections 171 to 178 of the Companies Act 2006) and misused funds, then liquidators (usually an insolvency practitioner) can pursue repayment of the funds from the directors personally through misfeasance claims. These claims can also lead to director disqualification and even criminal proceedings.

There can be a fine line, of course, between legitimate company failure, where directors did their best to trade through a crisis, but failed, and those directors who misused company funds, including Covid loans. Our advice if facing financial difficulties and insolvency is to talk to an insolvency practitioner as soon as possible. Research by R3 suggests that Insolvency Practitioners rescue insolvent companies in over 40% of cases.

What happens to companies that have fraudulently applied for a Covid Loan?

In a recent article by Insolvency Law firm Neil Davies & Partners, they point out that solvent companies suspected of fraudulently obtaining Covid loans are being attacked by HMRC using applications to Court for Bank Account Freezing orders. Such applications are made through the Proceeds of Crime Act 2002.

HMRC must have reasonable grounds to suspect that such companies have received Covid loans fraudulently, and again there can be a fine line between the legitimate and the illegitimate.

A key point, however, is that if a company is subject to a freezing order then whilst it is in that position and working up a defence with its legal advisors it does not have access to its funds, making it difficult to trade and making insolvency more likely.

The same thing is being seen even before HMRC gets involved, with it being reported by the National Association of Commercial Finance Brokers that the Treasury is warning banks to make fraud checks not only on application but also after loans have been approved and drawn down, leading to:

“….hundreds of business accounts being raided by banks including HSBC, Barclays, NatWest and Lloyds Banking Group after they were linked to suspected bounce back loans fraud. A letter to one customer from HSBC, seen by the paper, revealed it had “formally terminated” a bounce back loan agreement and demanded that the customer “repay immediately all monies advanced to you.” The bank told the customer that a clause in the agreement meant it did not need permission to dip into the firm’s current account to recover some of the cash.”

This is a worrying development if it happens to companies who have not, in fact, been guilty of fraud. In the time it takes to ‘clear their name’ they will not have access to the loan money, which could push them into insolvency.

Of course, where loans have been blatantly and clearly mis-used, and proven to be so, then recovery action against the directors who have received and then misused Government funds intended to help a company stay alive during the Coronavirus pandemic is fully justified within the law.

Talk to an Insolvency Practitioner if worried you cannot pay back your loan

Covid-19 has not changed the duties of directors when a company is insolvent, and that includes whether or not there is a Covid loan involved. For those companies who are simply doing their level best to ride things out and keep trading, as always, the sooner you take advice from an insolvency practitioner the better.

Contact us at any of our offices. The initial consultation is FREE and without obligation: