Bounce Back Loans: It’s payback timeby
As the government launches a £25m “fraud squad” to crack down on fraudulent Bounce Back Loans, banks urge struggling companies to go into insolvency.
It is now estimated that £10.6bn has been lost to fraud within the Covid-support programmes. This is due to criminal activity and inappropriate use by some directors of the Bounce Back Loans (BBLs) and other support schemes designed to help companies survive and restart their businesses post-pandemic.
As Chancellor of the Exchequer, Rishi Sunak, announces plans for a £25m “fraud squad” and the creation of the Public Sector Fraud Authority (PSFA) that will be run through the Cabinet Office to crack down on Covid-support abuse, some banks are urging companies who are struggling to repay loans to go into insolvency.
“Rishi Sunak was extremely generous in keeping the economy afloat and making sure that there wasn’t an absolute disaster, and we have seen a lot of genuine companies benefit from the BBLs and bounce back. But we have also seen a lot of companies that were probably doomed to fail anyway, that have just had their lifespan extended unnecessarily, and we need to look at those and assess for wrongful trading,” explains John Bell, senior partner, Clarke Bell Insolvency Practitioners.
Despite the BBLs being 100% guaranteed by the government, when a company goes into liquidation it becomes an “unsecured debt” and as such is not secured against any of the company’s assets. Therefore it can effectively die within the company.
“However, directors can still be held personally liable if they’ve committed misuse of Covid-support funds,” warns Lisa Thomas, insolvency practitioner at Neville & Co who has a YouTube channel to inform and engage with businesses and their accountants. “First, we need to check whether or not they have committed fraud in respect of the initial application for the loan. Secondly, we check whether the company met the criteria in the first place – whether the company was already in difficulty on 31 December 2019, and whether it was being adversely affected by the pandemic.”
As pressure mounts on banks to encourage companies to repay BBLs in a timely fashion, some fear that it will trigger a spate of forced liquidations by the banks in order that they can call in the guarantees from the government.
“The banks are required under the Bounce Back Loan scheme to make reasonable efforts to collect the debt from the borrower before claiming under the government guarantee,” explains Nick Hood, senior business adviser, Opus Business Advisory Group. “If the directors decide to put the company into liquidation, the likelihood is this will tick the necessary boxes to trigger the guarantee and an eventual recovery for the lender.
“The big question is whether liquidation is necessarily the right exit route for the business and its various stakeholders, particularly its employees, suppliers, and landlords. What is convenient for the lender may not work so well for them given the very poor returns for unsecured creditors in liquidation scenarios,” continues Hood.
“Under normal circumstances, lenders would want to take control of the situation by appointing administrators to try to rescue the business and/or maximise its recovery on their loans, but with BBLs, the banks were not allowed to take any security, so they have no simple mechanism to do so. They have no interest in committing scarce resources to helping the struggling business, because many feel that they can turn instead to the 100% government guarantee on the loan and get their money back that way.”
According to The Bounce Back Loan Scheme: an update from the National Audit Office, the terms of the guarantee require lenders to take “reasonable steps” to recover overdue payments. However, if a lender makes a claim on the loan guarantee, but afterwards an audit by The British Business Bank finds that the claim was made fraudulently, in bad faith, or other than in compliance with the guarantee terms, the lender is required to reimburse the government.
Trouble on the horizon
The spike in insolvency stats for March is alarming and an indication that there is trouble on the horizon.
“Throwing cheap money at struggling businesses on a ‘no questions asked’ basis was never going to end well,” says Hood. “Piling £47.4bn onto the balance sheets of 1.6m businesses at a time of gross financial and commercial disruption was a worthy attempt to stop viable entities from failing unnecessarily, but the consequences for some are looking increasingly dire.”
Reports of BBL fraud are on the rise, and The Insolvency Service is being quick to name and shame those in its director disqualifications database. “We have seen a lot of cases where BBLs have been used inappropriately: directors have bought cars, watches, jewellery, paid personal credit card debts etc,” says Bell. “They seem quite astounded when we tell them they will have to repay that personally – naively they assume it will be covered by the government guarantee.”
Insolvency practitioners get to see and hear it all. For some, BBLs have been a feeding frenzy where people thought: “Whoopee, free money”. As one IP told me recently, they had one guy come to them and say that he had “loaned the money to a fellow in the pub, who was going to invest it for him, and he had run off with the money.”
One can only assume the “investment” was on the 2.30 at Kempton!