Posted: 17 Jun, 2020
Since the Government’s Bounce Back Loan Scheme (BBLS) was launched on 4th May over £23 billion in loans has been approved to provide a lifeline to more than 780,000 SMEs and sole traders (HM Treasury).
But in the months and years ahead, will the Bounce Back Loan be repaid? Or will it come back to bite the lenders and the Government? There has been much debate over this in recent weeks due to the huge take up and the fact that applicants can self-declare their eligibility for the scheme with very few checks.
Responding to criticism over the Coronavirus Business Interruption Loan Scheme’s (CBILS) slow roll out and it’s lack of accessibility, the Bounce Back Loan Scheme (BBLS) was designed in such a way that lenders don’t need to assess affordability, so loans can be approved quickly.
This has meant that hundreds of thousands of businesses have received money they desperately need to stay afloat but it also means that loans are being given to businesses that won’t have a plan for repayment.
Unfortunately, many are viewing the loan scheme as a way for them to receive “free money” that they don’t even expect to repay. And with borrowers not needing to make any repayments for the first 12 months and lenders not permitted to take personal guarantees or hold collateral security over personal assets, you can understand why so many hold this view.
It is the view that several surveys released over the last few weeks have sustained, including a survey of 500 small UK businesses conducted by the Business Banking Resolution Service. 43% of respondents said that they don’t intend to pay back their Government-backed loans either because they don’t believe they will be pursued for the money or because they won’t be able to.
There have even been reports of Bounce Back Loans being used to buy sports cars and some landlords have reportedly been trying to use the loans as deposits for buying new properties. It hasn’t gone unnoticed that the 2.5% interest is far lower than a typical personal loan and so it’s no surprise that some unscrupulous people are using it improperly.
The assumption many directors are making is that if their Company is unable to recover from the impact of Covid-19, and therefore enters into a formal insolvency process, then the responsibility for repaying the Bounce Back Loan will die with the company.
However, this will not be the case if directors have acted improperly and abused the loan scheme or breached their fiduciary duties. HM Treasury has made it clear that “any fraudulent applications can be criminally prosecuted”.
Directors, therefore, need to be mindful of their liability for any potential misconduct and be careful how they use the loan. While it should go without saying that using the loan to buy a sports car for personal use breaches the loan conditions, directors also need to be careful when using the money to refinance existing borrowing. While this isn’t in itself prohibited, directors need to be careful about paying off debts which they have personally guaranteed, thereby leaving the bank unpaid and an unsecured creditor. In the event of an insolvency process, this could be seen as an act of misfeasance by treating personally guaranteed creditors as a preference under which circumstances an insolvency practitioner may hold the directors personally liable.
Will the Bounce Back Loans be repaid?
It is clear that many businesses won’t survive beyond a year or two and much of the money given out in Bounce Back Loans will be unrecoverable but for those businesses that do survive, the terms state that they must repay.
But with the attitude of many being that they won’t repay because they don’t think they will be chased, if the banks want to recoup their money (and given their lack of security), it seems likely that recovery action will be pursued on a huge scale.
There has also been much discussion about whether the loans may be converted or forgiven in the coming years. A recent report by TheCityUK’s Recapitalisation Group forecasts that by March 2021 UK businesses are likely to face £32 – 36 billion of unsustainable debt stemming from Covid-19 lending schemes and with such a debt burden, the Government will be forced to step in and either offer a programme of loan forgiveness or convert the loans into grants which will have the same effect of them being written off.
It seems likely that there will need to be a serious review in the coming years about how the Treasury and the banks can reclaim Covid-19 loans without risking further business distress and insolvencies.
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