The Bounce Back Loan – is it a ‘bouncing bomb’?
Many small and medium-sized businesses have received a Bounce Back Loan (BBL). In fact, 860,000 loans were approved in the first six weeks. These loans are essential for businesses affected by the coronavirus pandemic.
However, it is important that you do not inadvertently create a problem for yourself by not realising the potential consequences of what you do with this money.
HM Treasury has clearly warned that any misuse of the scheme could result in prosecution for fraud.
This article is to help you consider the implications of what you may already have done with your Bounce Back Loan or what you may be going to do.
Your Bounce Back Loan terms and conditions
It must be remembered that Bounce Back Loans are a debt – not a grant – and consequently have terms and conditions attached from the lender. Check these very carefully.
Common conditions that you must be aware of are:
- There is only one application per ‘group’. If you have applied for more than one business that is under common ownership or control, then this is fraud;
- You must not have already received a loan under the Coronavirus Business Interruption Loan Scheme (CBILS), the Coronavirus Large Business Interruption Loan Scheme (CLBILS) or the COVID-19 Corporate Financing Facility (CCFF) unless you are refinancing it in full with the Bounce Back Loan. You have until 4 November 2020 to arrange this with your lender;
- The BBL is an alternative source of finance if you have been affected by the coronavirus outbreak. It can be used for a wide range of purposes, such as working capital or investment, but it MUST support trading or commercial activity in the UK. It is NOT for personal use;
- If the business that takes out the loan is in default under the terms of any other borrowing facility, whether it is with the same lender or not, it will be deemed to be in default of the Bounce Back Loan; and
- Be particularly careful if your business needs any other source of funding during the life of the BBL taking any form of security, mortgage, charge, pledge, lien, or encumbrance over its assets whatsoever. You must check this is allowed in the loan terms and conditions as often it is not.
Bounce Back Loans and fraud
A Treasury spokesman recently said: “Our Bounce Back Loan Schemes are designed to keep businesses running during this difficult time …we’ve been clear that the loans must be repaid and banks are undertaking appropriate precautions against fraud, including customer checks and the monitoring of transactions. Any fraudulent applications can be criminally prosecuted.”
How is fraud being committed?
There have been a number of articles written in the last few days about Bounce Back Loans being used to fund luxuries such as supercars. Car Dealer Magazine has spoken to several top end car dealers, reported in its article of 21 June, who all confirmed this definite trend.
One said “he’d sold cars to clients who had used Bounce Back Loan cash to fund part of the deals and said he believed businessmen had even used dormant companies to raise cash at low rates to splash out”. Another explained, “Three customers in a row told me they were using the Bounce Back Loans to put down deposits on the cars they’ve been wanting for years.”
The lines between what is and what is not company money can easily be blurred. Liquidators regularly deal with directors of insolvent limited companies, who routinely use the company bank account as an extension of their personal bank account. Sometimes the first time a director becomes truly aware of the implications of that is when a liquidator asks for the many thousands of pounds of those transactions to be repaid.
The Daily Record has quoted a shop owner in Glasgow as saying, “so many businesses will die, and the debt will die with them. Then there will be others that just do not pay it back and will test the government’s resolve in chasing them for it. If you’ve got that mindset it’s like free money”.
This is most definitely not true and a very dangerous way to view the situation.
Do not forget your lender has a legal duty, as part of its money laundering obligations, to report to the National Crime Agency if they have a suspicion that you have obtained or you are using a Bounce Back Loan fraudulently. The matter would be investigated, and you could face criminal prosecution.
Your accountant or Bookkeeper has a similar obligation to report any suspicion of fraud.
Another relevant point is that a motor trader who is regulated as a ‘High Value Dealer’ (a business that receives the equivalent of €10,000 or more in cash for the sale of goods) has a similar duty.
Is your company solvent?
The Bounce Back Loan was introduced to provide funding quickly and efficiently to a business in difficulty due to COVID-19. We would not recommend seeing this as an opportunity to pay back loans from yourself to your business or to borrow money from the company.
If your business has trading difficulties, becomes insolvent and is not able to recover from that position then it could be placed in a formal insolvency process.
The appointed insolvency practitioner will need to identify the point in time when the company was last solvent. They must then review the activities of the business and establish the reasons for the failure of the business.
Is there a risk you have applied for a BBL when your company was ‘technically’ insolvent, but you did not know? Has your company become insolvent from your subsequent actions after taking the loan e.g. you taking a loan from the business?
How to find out if your company is insolvent
Balance sheet insolvency - a company is insolvent if it does not have sufficient assets to discharge its debts and liabilities. In simple terms - is the total of what you owe more than you own? The easiest way of identifying this is if a company has positive reserves on its balance sheet.
Cash-flow insolvency – when a company cannot make a payment when it is due. This will often be highlighted by a demand for payment by a supplier or lender the business is unable to meet.
Potential consequences of having an insolvent company
The key principal of insolvency law is that those owed money by the business must be treated fairly. For example, if 10 people are owed £1,000 and the company has £1,000 then they should each get £100.
Any payments by the business that do not follow the correct legal priority may well be reversed if the business ends up in a formal insolvency process. Be careful not to make payments that could ultimately be reversed by the insolvency practitioner.
For example, a repayment of a loan to yourself in priority to others. This could apply to repayment of loans to family and business associates. If your business has received a Bounce Back Loan and you have ‘borrowed it’ for your personal use, then you could legally have to pay back what you have borrowed.
This could put your personal assets at risk if you have spent the money.
Can you pay yourself a dividend or salary with a Bounce Back Loan?
Martin Lewis of Money Saving Expert has recently written a useful article on personal use of Bounce Back Loans. He asked the Treasury whether the loan can be paid as a dividend if a business has retained profits but is cash poor.
The answer to the question was ‘yes’.
However, a broader answer might have included a discussion on taking dividends from a company when the company might be deemed to be insolvent. A dividend paid from an insolvent company may also need to be paid back if the company enters a formal insolvency process.
Beware – if by making the dividend payment your company has become insolvent then you could similarly find yourself having to pay the dividend back.
Any salary taken via a PAYE scheme should be set at a reasonable level. An excessive salary would also be investigated by an insolvency practitioner during a formal insolvency process.
As Martin Lewis said in his Bounce Back Loans article, "it’s likely to be far trickier to argue that you can increase your salary (even to cover lost dividends) as these loans have to be used for the economic benefit of the company, not the individual."
Richard Simms, managing director of F A Simms & Partners Limited