Posted: 17 Feb, 2022
In January, two directors were disqualified for a total of 21 years because they were found to have abused the Bounce Back Loan (BBL) scheme.
Both were directors of a specialist tuition centre, Scholars Academy Ltd, and were disqualified after the abuse was discovered when the company went into voluntary liquidation in January 2021. At the time of the liquidation, the directors listed the company’s liabilities to the bank as £7,000, but the bank notified the liquidator that it was owed £50,000 by the company, due to a Bounce Back Loan.
An Investigation by the Insolvency Service discovered that the directors had fraudulently inflated the company’s turnover to meet the minimum turnover threshold necessary to be eligible for a BBL. They provided an estimated company turnover of £200,000, however the investigation suggested its annual turnover would have been a maximum of £7,680 – under the minimum threshold of £8,000.
After receiving a BBL of £50,000, the directors then used the funds to make monthly payments to four individuals with no evidence to support their claim that these payments were genuine business expenses. One of the directors also fraudulently claimed a second BBL for another company he was the sole director of.
Speaking about the case, Mike Smith, The Insolvency Service’s Chief Investigator said “The Insolvency Service will not hesitate to investigate and use its powers against those who appear to have abused the Covid-19 support schemes”.
While it is clear that the directors of Scholars Academy Ltd knowingly abused the BBL scheme, when the scheme was launched, the guidance provided with it was limited. There was very little guidance on what the Bounce Back Loans could be used for and instead companies were told they could utilise the funds in any way that would provide an economic benefit to the business.
For some directors, this meant using the Bounce Back Loan to improve working capital, modify business operations to allow trade to continue, or even refinance existing debt. These were all perfectly legitimate ways of utilising the loan as they all can be seen to provide a benefit for the company and improve its ongoing viability.
But BBLs could also be used to pay staff salaries, including director salaries, and in some cases, dividends. This is where there was more potential for misuse, inadvertent or otherwise.
What might be regarded as Bounce Back Loan misuse?
When launched, the Government stated that the BBL must be used for the ‘economic benefit of the business’. While this is somewhat vague, it does mean that using BBL money to purchase personal assets, transferring it into a personal bank account or giving the money to a family member or friend could constitute misuse.
There was a time when many people viewed the BBL as ‘free money’ that could be viewed as a debt that would die with the death of a business. Others viewed it as a loan that the Government would never be able to chase.
But the case of Scholars Academy Ltd shows this to be a dangerous attitude.
In particular, misuse of a BBL could have some serious repercussions should the business be unable to repay the loan and the company enters liquidation or administration. In the event of liquidation or administration the reasons behind the business’ failure will be investigated and the officeholder has a duty to report any suspected fraud or misuse to the Insolvency Service.
If found guilty of misusing BBL funds, directors may be held personally liable for repaying the outstanding balance due on the loan. As in the case of Scholars Academy Ltd, directors could also face disqualification and even hefty fines.
What should you do if you are worried about how you used your Bounce Back Loan?
It is clear that the Insolvency Service is taking active steps to penalise directors whom they believe have misused the Bounce Back Loan scheme. However, if your company is able to continue making your loan repayments, you will not be asked what you spent the money on.
But if loan repayments are missed, or the company enters liquidation or administration, investigations over the use of the loan will commence and directors must be prepared to show evidence that the loan was used for the economic benefit of the business.
It is also worth noting that dissolution is no escape. Last year the Government introduced legislation which allows HMRC and the Insolvency Service to pursue directors who dissolved their companies, without first placing them into liquidation, leaving outstanding debts including bounce back loans or tax. The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act allows retrospective investigation and action to be taken against directors and can lead to disqualification and personal liability.
It is therefore important that directors who are struggling to meet repayments under the BBL scheme, or are worried about potential misuse, should speak to a professional advisor as soon as possible.
TMA UK is part of TMA, a global organisation that represents the interests of turnaround professionals as its members who have the skills needed to assist companies in challenging times. If you need assistance, please contact our helpline on 0844 804 0116
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