Over 800,000 businesses affected by the Covid pandemic received the BBL in the first six weeks since it all began in March 2021.
HM Treasury have very clearly stated that if the funds were misused then it could and will in certain circumstances lead to prosecution of the applicants.
Did you read the terms and conditions?
Firstly, the BBL is a debt on your balance sheet and NOT a grant . The difference being – loan must be paid back, and the grant doesn’t.
Here are the most important terms you MUST be aware of.
- It is fraud IF you have applied for more than one business that is under common ownership or control. So if you are a director and shareholder of say for example three companies then only one BBL is allowed for the group.
- 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 30 November 2020 to arrange this with your lender.
- The BBL 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. It is clearly and alternative source of finance.
- If you are unable to make repayments towards the BBL then you are in default of the terms of the BBL and any other borrowing.
- It is important that you review any other funding which was applied during the term of the BBL. Any other form of security taken out over the assets of the business , a mortgage , or a lien over the assets of the business MUST be reviewed very carefully. Check the terms to ensure that you were allowed to do this.
Fraud and BBL
It is clearly stated that the BBL was made available to keep businesses running during the pandemic.
The loans MUST be paid back. The financial institution involved in dealing with BBL are undertaking appropriate precautions against fraud, including customer checks and the monitoring of transactions. Any fraudulent applications can be criminally prosecuted.
Committing fraud
It can be tricky in drawing a fine line between what is company money .
Insolvency Practitioners ( IP ) deal with so many companies which are placed into liquidation where the directors have regularly used 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.
We have some useful information on our website which differentiates between company funds and personal fund.
Rest assured that if you have used BBL funds for personal use THEN you will be investigated. There has been a recent trend where directors of companies are getting their Company struck of the register at Companies House in the hope that they will not be pursued.
However, there is currently some legislation at the House of Lords which if it is passed will mean that directors of dissolved companies will also be investigated in the event of BBL fraud. The timings of this legislation passing are estimated to March 2022 and will be retrospective. So it could mean some serious trouble for the directors who have dissolved their companies.
There is an article around dissolved companies and BBLs on our website which explains this in more details.
Money laundering
The Money Laundering obligations are severe, and the lenders MUST report any suspicious activity The National Crime Agency if they suspect that you have obtained, or you are using a Bounce Back Loan fraudulently. If it went this far and the case was investigated the implications are that you will be investigated, your bank accounts are likely to be frozen and it could cause significant personal stress and upheaval in your life if criminal proceedings were to be considered.
The accountant looking after your company’s accounts bookkeeping also has a duty to report any suspicious activity. There is an article on this topic on our website. It deals with the accountants’ responsibilities in BBLs.
Solvent or Insolvent?
The Bounce Back Loan is NOT 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 IP appointed to deal with the liquidation or administration will have to investigate at what point the Company became solvent.
The director is asked to prepare a narrative statement explaining the circumstances leading to the making of the decision to place the company into liquidation. The IP then reviews the narrative statement and activities of the business and establishes the reasons for the failure of the business. There are various queries which arise because of the review by the IP. Did you apply for the BBL when the company was insolvent ? Did you know that the Company was insolvent ? How the Company became insolvent? Has your company become insolvent as result of your actions? Was it the BBL which had a negative impact on the Company’s balance sheet ?
It is very important that when you write your narrative statement that you have taken professional advice so as not to implicate yourself of any breaches which could result in legal proceedings being commenced OR that the IP reports your conduct to the Insolvency Service under the Company Directors Disqualification Act 1986.
Is your company insolvent
There are two ways to test this. The balance sheet test and the cash flow test. Again, there is a detailed article around this on our website.
Balance sheet test – 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 as and they are due. This will often be highlighted by a demand for payment by a supplier or lender the business is unable to meet.
Insolvency legislation states that those owed money by the business must be treated fairly. For example, you CANNOT pay more money to one creditor and differentiate between that creditor and another creditor. Every creditor must be treated equally. There are certain creditors who by law have priority and so those are treated differently.
Associated creditors
Payments to certain creditors can be reversed in insolvency if NOT made in the normal course of business OR do not follow the legal priority. As a director you would have no idea what the legal priority is and so it is even more important that you obtain advice beforehand so that you are fully aware of all the consequences of any action you take and or the consequences of what may happened when you provide the information to the IP.
Be very careful!
The insolvency law is very prescribed, but it is how that law is used which is key.
So , if you pay a family member who is owed money in priority to other creditors then this is classed as preferring them over the other creditors as they are deemed to be associated to you as the director of the company and so could be asked to repay those funds back into the company after the liquidation.
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. It is important to remember that some of these actions can have effect on your personal assets. So be careful and always take advice beforehand.
Dividend to directors and BBL
Dividends
Can BBL be used to pay a dividend to the shareholders if a business has retained profits but is cash poor. Technically YES BUT only if the company is NOT deemed to be insolvent.
If the company is deemed insolvent, then that dividend payment will have to be paid back if the company enters a formal insolvency process. Again, be very careful when making the decisions on making ANY payments using BBL funds.
Your salary as a director of the company should also be set at a reasonable level under the PAYE scheme. If the salary is excessive then this would also be investigated by the IP if the company is placed into liquidation.
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