In May 2020, the UK Government introduced the Bounce Back Loan Scheme with the aim of helping small to medium sized businesses through the Covid-19 pandemic. Under the Scheme, businesses could borrow between £2000 and £50,000 (up to a maximum of 25% of their turnover).
No fees or interest were payable on the 100%-Government-backed Loans for the first 12 months. To qualify for funding through the Scheme businesses had to have been trading prior to 1st March 2020. Understandably, the number of businesses applying for a Loan was high. More than 1.5 million Bounce Back Loans were granted, totalling more than £47 billion. However, recent data shows a significant increase in director disqualifications investigations, suggesting the Scheme was open to abuse.
Use and repayment
Bounce Back Loans may only be used for legitimate business purposes.
Available over a fixed 6 year term, the term of the Bounce Back Loan could be extended to 10 years in certain circumstances. After the first year, interest would be payable at a rate of 2.5%p pa. Understandably, with terms as attractive as these, many businesses saw the Loans as a lifeline during the pandemic.
Abuse of the Scheme
The majority of businesses that received a Loan under the Scheme followed the rules on qualification, borrowing limit and use. A recent rise in Director Disqualifications is evidence that the Scheme was open to abuse. This include Loans:
- wrongfully obtained through overstating a business’ turnover;
- claimed by companies that had ceased trading prior to the pandemic;
- claimed by companies that had not been trading long enough to qualify; and
- not used for legitimate business purposes (including misuse for personal purposes).
What happens if a business defaults on repayments?
It is important to remember that honest businesses faced real financial difficulties because of the pandemic. This resulted in a significant number defaulting on their repayments of the Bounce Back Loan.
If a business defaults on loan repayments, this may indicate that the business is insolvent. This does not automatically mean that the director(s) have done anything wrong.
The Insolvency Service is investigating an increasing number of companies that defaulted on Bounce Back Loan repayments.
Insolvency Service’s role
The Insolvency Service has power to investigate limited companies and limited liability partnerships which:
- are actively trading; or
- cease trading.
Increasingly, The Insolvency Service is investigating Bounce Back Loans where a business has failed. This has led to a rise in Director Disqualifications and Compensation Orders.
Director Disqualification
Director disqualification is a serious matter. Orders span between 2 and 15 years. Put simply, director disqualification is the process whereby a person is disqualified, for a specified period, from acting as a director of a company. This means the disqualified individual cannot be involved in the “promotion, formation or management” of a company, including acting as a “shadow director”, without permission from the court. The Company Directors Disqualification Act 1986 (CDDA) applies.
Disqualification Orders are made by the court. Alternatively, directors may offer to give a disqualification undertaking, which has a similar effect to an order. The benefit of an undertaking may be a reduction in the number of years of prohibition and to reduced legal costs.
Compensation Orders
Compensation orders make directors personally responsible for the consequences of their unfit conduct. They impose a financial penalty on the individual director thereby removing the ‘limited liability’ protection offered by a business’ limited status.
Currently, Compensation Orders are being pursued more as are longer proposed periods of disqualification.
How can we help?
The majority of directors act properly and with good intentions. It is important for a director to explain their actions on insolvency.
It is crucial that directors obtain professional advice at the earliest opportunity. This includes:
- concerns about Bounce Back Loan repayments;
- investigations by the Insolvency Service;
- considering giving a voluntary disqualification undertaking or compensation undertaking; and/or
- applying to court to act as a director when disqualified.
By seeking legal advice early on we aim to improve your position. This may be by:
- negotiating with The Insolvency Service;
- getting a reduced period of disqualification;
- reducing the value of a Compensation Orders; and/or
- removing any disqualification proceedings all together.
Engaging with the Insolvency Service and their investigation with proper advice is likely to improve your prospects. Failure to do so may result in the the outcome being determined without an opportunity to present your position and will invariably increase your legal costs.
Get in touch
This article does not constitute legal advice. If you need any help or further information in relation to Director Disqualifications, Compensation Orders, The Insolvency Service or any aspect of insolvency, please contact us on 0113 266 0735 or at info@bailoransolicitors.com to speak to one of our legal experts.