The downside of the government’s Bounce Back Loans is that 20 per cent of borrowers are asking for more time to pay and some companies could be tipped into insolvency.
Antony Batty & Co, insolvency practitioners in Bournemouth, has some advice.
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 around 300,000 of them 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 six 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. With support beginning to wind down, and repayments now due, the company answers 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?
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.
A spokesman from Antony Batty & Company said: “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 four 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.
The spokesman said: “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.”
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