Last month the Times featured an article about how “suitcases filled with cash from taxpayer-backed Covid loans were seized at the border as people tried to smuggle them out of the country.”
The article went on to say how the recipients of the Covid loans used the money to fund gambling sprees, home improvements, cars and watches. From my own experience, directors have used the money from the Covid Loans to also purchase bit-coin, paying off their mortgages, or repaying the money their business owes them. I thought therefore that this may be a good topic for my next blog.
When a Company is placed into Creditors Voluntary Liquidation, the appointed Liquidator has two important roles to fulfil.
The first, is to undertake a review of the Company’s financial affairs, in accordance with Statement of Insolvency Practice Number 2 (“SIP 2”).
The second, is to undertake a review of the director’s conduct. This used to be done in accordance with Statement of Insolvency Practice Number 4 (“SIP 4”), but SIP 4 and SIP 2 have now been amalgamated.
Once the Liquidator has undertaken the above reviews, the Liquidator must then report their findings to The Insolvency Service, within 3 months of their appointment.
In terms of Bounce Back Loans the Liquidator will essentially be looking at three things:
1. Was the company entitled to apply for the loan?
2. What was the company entitled to claim?
3. What did the company spend the funds on?
Was the Company Entitled to Apply for the Loan?
For the Company to apply for a Bounce Back Loan, the business must have been based in the UK, have been established before the 1 March 2020, and have been adversely affected by the Coronavirus pandemic.
While this appears to be quite a simple test, nonetheless it has still been open to abuse.
If, for example, a company had already ceased to trade prior to Covid-19 and had been closed for several months it is in my view difficult to see how the business could have been affected by Covid-19. It had already ceased to trade so there was nothing to affect however there has been instances where dormant companies have been revived purely to obtain the Bounce Back Loan.
What was the Company entitled to Claim?
A company was entitled to claim up to 25% of their annual turnover, capped to maximum loan of £50,000. However, previous years accounts and trading records, did not have to be relied upon. Instead directors were able to use forecasted or anticipated turnover figures.
There have been plenty of examples where companies were only turning over say £50,000 or so annually, but suddenly were forecasting to turnover £200,000, which would enable them to claim the full £50,000.
While some element of forecasting of turnover figures may well be acceptable, they must be reasonable and be backed up by cashflow forecasts that have been properly prepared.
If a director cannot justify the increased turnover figure, then they may well have breached their fiduciary duties, or potentially be accused of abusing the Bounce Back Loan Scheme.
In addition, there have also been many instances where directors were able to claim several bounce back loans, each totalling £50,000.
The result of the above, is that if the directors have claimed more than they should, they are likely to face calls from the Liquidator to repay funds personally, and also face action from The Insolvency Service in respect of being disqualified as a director.
What did the Company Spend the Funds On?
The monies received from the Bounce Back Loan were supposed to be used on business expenditure, but what constitutes business expenditure?
While spending the funds on gambling, paying off your mortgage, buying bit-coin etc, are obviously not business expenditure, what about paying off a business loan? Also, what if that business loan was personally guaranteed? Would that be a preference or an act of misfeasance?
On the face of it, there is a personal benefit for the director and therefore arguably a preference has occurred. But what if the rate of interest for the Bounce Back Loan was lower? Would the Company not be reducing it’s overheads by paying off the more expensive loan. It is hard to argue with that economic argument, despite the obvious personal benefit.
According to the newspapers £17 billion of Bounce Back Loans were made, and about £4.9 billion is expected to be written off as fraud. Personally, I think that the figure will be far higher than this.
The article in the Times also gave the following examples that had been identified:
• A gambler used a £50,000 bounce-back loan to fund poker games after claiming his company turned over £200,000, even though he only had £2.72 in his account.
• One businessman breached scheme rules by securing more than ten pandemic loans for companies in the same corporate group.
• A sandwich shop owner received a £35,000 loan for his business before using it to fund the refurbishment of his garden, gambling losses and a new business that went bust within six months.
• A pub landlord paid himself £30,000 after claiming one of the business loans in “consultancy fees”.
• A soft drink company owner inflated his firm’s turnover by 100 times on his application to get a maximum £50,000 loan.
• A restaurant owner was able to get a loan after having already been evicted from his premises for not paying rent.
These breaches resulted in Disqualification Orders, Disqualification Undertakings and Bankruptcy Restriction Orders being made in respect of the various directors involved however I am not sure what, if any, money was, or will, be recovered for creditors, which ultimately includes the Tax Payer.
In these uncertain times, there are bound to be many directors and business owners who will be concerned about their situation and their ability to repay the Bounce Back Loans that have been taken out. If those directors and business owners have genuinely done their best however, have documented any decisions made and those decisions, having regard to the information available to them at the time, would be considered to be sound by any reasonably diligent person reviewing the matter then any issues identified should be easily resolved.
If you wish to discuss anything in this article, are concerned about your own affairs, or that of your business or company, please contact Chris Parkman of Purnells on 01325 340579 or at firstname.lastname@example.org