If you took out a Bounce Back Loan (BBL) and you’re now worried about how you’re going to repay it, you’re not alone.
As lockdown began, a lot of directors applied for Bounce Back Loans in good faith. But the world was very different then. No-one could read the future and few imagined that lockdown would last so long. So many who took out a loan with confidence that they would, indeed, ‘bounce back’ now find that their business is still not trading at pre-pandemic levels and are finding it impossible to repay loans that would have been perfectly manageable in the previous business landscape.
Many of these directors are now concerned at growing publicity about fraud investigations and company directors being held personally liable if irregularities are found in the application or how the funds were used. But there really is nothing to be gained by hiding your head in the sand. If your business is in financial trouble, you’re only putting off the inevitable, and the sooner you get advice from experienced Corporate Recovery professionals, the more can be done to help.
The sooner the better
With the lifting of enforcement restrictions, you may find a creditor gets in ahead of you – which means you’ll no longer be in control of the situation.
Other options are also dwindling as time goes on. For instance, since voluntary strike-offs soared during the pandemic, the Government passed the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act to prevent dissolutions of companies with outstanding BBL and CBIL loans.
So what can you expect? Well, the harsher treatment is reserved for those who very clearly obtained loans fraudulently – applying on behalf of dormant companies, for instance, and spending the cash on personal items. These directors are being rewarded with imprisonment and disqualification periods of up to 15 years.
If your company was trading as at 30 March 2020 you applied for a loan no bigger then 25% of turnover to provide an economic benefit to the business (i.e. not personal use), you’re on firmer ground. Payments to suppliers, landlords and other ongoing costs are usually fine and in the spirit of keeping a business going during some extremely difficult trading circumstances. Payment of staff salaries (subject to any furlough benefits that might also be claimed) is permitted and paying directors salaries and drawings at the normal pre-covid level are also permitted. However, we will return to this point later below. The BBL could also have been used to pay off / restructure existing finance providing there is an over-all benefit to the company in doing so.
So What About the Grey areas?
Things can get a bit more tricky if some or all of the BBL loans have been paid out on transactions that don’t fit firmly into the intended uses of the loan. In most instances, the loan monies will have been dissipated through a number of smaller transactions and not simply one or two larger transactions.
Starting with Directors salaries, we have established that continuing to pay directors salaries at or below pre-pandemic levels should be ok. However, most small businesses are Director/Shareholder owned and commonly use the system of making payments “on account” to a director, creating an overdrawn loan account and at the year end, declaring a dividend to eliminate the overdrawn balance. However, the pandemic may well have curtailed the ability to make profits and therefore pay dividends, leaving a director high and dry with a loan account balance that a liquidator will be looking to collect from the Director.
We have also seen examples of BBL funds being used to repay loans already made to a company by its Directors. Whilst restructuring existing finance was permitted, there has to be a commercial benefit to the company in doing so. There is also the risk that such transactions may be deemed preferential payments if the company subsequently enters a formal insolvency process.
How Xeinadin Corporate Recovery can support you
We can review and analyse the use of BBL loan funds in detail and can explain to you and your clients any areas of concern that we might discover. Our aim is to make those grey areas a little clearer and look at the context in which the loan was obtained and how the monies were used. The pandemic threw up some extreme challenges for Directors and understanding the position at that time and the background to decisions taken by Directors can be very important.
So please don’t let things drift. Get in touch with the Xeinadin Corporate Recovery Team today, and we’ll get to work straight away putting the necessary support in place. We’ll put together a turnaround strategy and plan the restructure. If there are tough decisions to take, we’ll be in your corner and we’ll help you negotiate with your creditors, preparing valuable financial forecasts and timelines to give them a clear picture of your potential.