Various loan support schemes were introduced by the UK government to help businesses during the coronavirus pandemic. Two of the most well known (and most utilised) of such schemes are the Bounce Back Loan Scheme (BBLS) and the Coronavirus Business Interruption Loan Scheme (CBILS). These two schemes (Schemes) were subject to government-backed guarantees, as to 100% in the case of BBLS and 80% for CBILS.
BBLS and CBILS have received much attention in the press, not least due to the risks of fraud and error associated with them and the resulting taxpayer losses. A recent judgment handed down by the First-Tier Tribunal (FT), summarised below, sheds further light on some of these issues.
Now that the Schemes have closed and payment dates are looming, how will the lenders step in to recover defaulting loans and what impact will this have on directors of companies with outstanding BBLS or CBILS balances?
As summarised below, directors of companies in financial difficulties will need to consider their options very carefully. It is particularly important that directors of companies with outstanding CBILS and/or BBLS balances seek advice early as to the appropriate route for winding down of the company, for in certain circumstances they may face further scrutiny as to the basis of the application and use of scheme funds.
The “Spotlight on Corruption” freedom of information request
On 4 January 2023, the FT handed down its judgment in Spotlight on Corruption & Anor v Information Commissioner & Anor  UKFTT 7 (GRC).
The case concerned a freedom of information (FOI) request by Spotlight on Corruption seeking the publication of the names of all companies that had taken out Scheme loans. As the applicant’s name suggests, the purpose of the FOI request was made with the aim of greater transparency (and scrutiny) as to government spending of public money and assisting in the detection of fraud.
The FT held that disclosing the names of Scheme borrowers to the general public would cause reputational damage and expose borrowers to targeting by fraudsters. Accordingly, the FOI request was refused on public interest grounds.
The FT’s judgment highlighted issues surrounding fraud and error associated with the Schemes. This leads me to consider the overall performance of the Schemes as publicised to date and, more generally, the issues facing directors of companies with outstanding balances on BBLS and CBILS.
An overview of the performance of CBILS and BBLS
BEIS recently reported (here) that over £47bn has been made available to borrowers via BBLS and over £26bn via CBILS during the pandemic.
The Government has recognised that there have been high risks of fraud and error, particularly in relation to BBLS. Unlike CBILS, BBLS relied on self-certification of eligibility and did not involve credit checks and this increased the risk of fraud. The latest figures from BEIS estimate that the taxpayer is likely to face losses of approximately £1.12bn due to fraudulent activity in relation to BBLS.
Indeed, the Insolvency Service’s recent press releases contain abundant news of director disqualification proceedings and bankruptcy restrictions concerning fraud and misconduct associated with the Schemes.
However, we are yet to see the full extent to which the taxpayer will be required to fund the losses incurred in relation to the Schemes. Of course, such losses will not be limited only to cases involving fraud and error but will also include cases where businesses defaulted on the loans for credit reasons.
The latest statistics released by the National Audit Office in December 2021 (here) specified that BEIS estimate that between 31% to 48% of BBLS loans will not be repaid, with its most likely estimate being 37%. This would amount to an overall loss to taxpayers of £17bn on BBLS alone (noting the caveat from BEIS that the estimated figures are, as yet, tentative and the actual loss uncertain).
CBILS is expected to have a lower risk profile and although there is no similar “future loss” estimation by BEIS in relation to CBILS (at least that I can find), the latest statistics released by BEIS as at 31 March 2022 (here) confirm that approximately 1% of CBILS are currently in default with approximately 1.3% in arrears (an approximate loan value of £400million in default and arrears). Significantly, BEIS have reported that the value of loans in default as at 31 March 2022, across all Schemes, amounts to approximately £2bn.
With insolvency numbers expected to rise in the UK in the coming months due to the macroeconomic pressures continuing to be faced by businesses, a more accurate picture of the losses – whether arising by reason of fraud, error or credit – will no doubt start to emerge.
How can BBLS and CBILS defaulting loan books be enforced?
There are various avenues that can be taken against companies (and, in certain cases, directors personally) for Scheme loans which are in default.
The Public Accounts Committee has recently criticised BEIS for relying too heavily on lenders to fix credit and fraud risks and, on the basis that the taxpayer underwrites the scheme, there is perceived to be limited commercial incentive for lenders to maximise recovery of overdue loans.
Whilst it is correct that claiming on the government guarantee is not conditional on having completed the recoveries process (as lenders are able to make a claim on the government guarantee “within a reasonable time period” following the first formal demand date), the terms of the guarantee require the Scheme lenders to take “reasonable steps” to recover overdue payments. Lenders must follow the Scheme’s detailed recovery principles and industry regulations and are expected to try to recover the loan by following their usual approach (which may include using debt collection agencies). A borrower’s experience on loan default will therefore depend on their lender’s standard approach, which is likely to differ between lenders.
In any event, lenders can clearly take enforcement action against companies directly for the recovery of the outstanding loan payments. Such action may include winding up proceedings being instigated against the Scheme borrower. Indeed, there are some recent reports that banks are already starting this process, with a number of winding up petitions having been presented at the High Court by one bank in particular (news report here).
Where loans are backed by personal guarantees, lenders will of course be able to pursue the guaranteeing individuals directly. This could include pursuing debt proceedings and/or bankruptcy proceedings against the individuals in question if a guarantee is called upon and not paid in full.
What does this mean for directors of companies with outstanding BBLS or CBILS balances?
Outside the context of a personal guarantee, it is not usual for directors to be personally liable for the company’s debts. However, there are exceptions to this rule, particularly in the insolvency context.
If a company goes into an insolvent administration or liquidation, an insolvency practitioner will be appointed over the company and will be entitled to bring a claim against a director who breaches the obligations and duties of a director arising from his or her office. This could include, by way of example, claims for misuse or misapplication of BBLS or CBILS loan funds. In such cases it is possible that a director might be liable to compensate the company for breach of duty, might incur personal liability for the company’s debts and might also face criminal or civil penalties.
Insolvency practitioners are also required as part of their statutory duties to consider and report to the Insolvency Service on the conduct of directors. This would include reporting on any potential abuse of the BBLS or CBILS that they discover during their investigations.
The Secretary of State (and in turn its executive agency, the Insolvency Service) will in some cases prosecute directors of an insolvent company where such prosecution is deemed to be in the public interest. If a director’s conduct has fallen below an acceptable standard a court may impose a disqualification order, preventing a director from acting as a registered director for a period of up to 15 years.
Further, through the introduction of the Ratings (Coronavirus) and Directors Qualification (Dissolved Companies) Act 2021 (the Act), the Government has recently enhanced the powers granted to the Insolvency Service to enable it to investigate and disqualify the directors of dissolved companies.
The Act empowers the Insolvency Service to pursue disqualification proceedings against directors without going through a formal liquidation process and without having to restore the company first. Directors will therefore need to pay careful attention to their duties when considering whether to dissolve their company. The Act also has retrospective effect and can catch dissolutions taking place prior to the Act coming into force.
It is clearly important that directors seek appropriate advice and prior to taking any steps to wind down their company or apply for strike-off at Companies House.
There will be various options available to a company in financial difficulties. Indeed, the best protection is for directors to understand their responsibilities and take appropriate advice as early as possible and to take action when necessary.
Our Insolvency & Turnaround team can advise further in this area.
This article is not legal advice, which it may be sensible to obtain before you take any decisions or actions in the areas covered. Please do contact me if you would like an initial discussion of your situation.