1st March 2022
The bounce back loan scheme was one of several financial support systems put in place to help businesses survive the restrictions imposed during the height of the covid-19 pandemic. About one in four UK businesses applied for a bounce back loan and the funds provided approximately £47.4 billion of credit via 1.6 million loans. For many businesses the support has worked as intended, proving to be the difference between continuing to trade and entering insolvency.
While the scheme was heralded as the way for small businesses to quickly and easily access loans of between £2,000 and £50,000, there were concerns at the time that the speed and ease at which the loans could be obtained would be open to abuse by fraudsters. Bounce back loans were particularly vulnerable to fraudulent activity due to the limited due diligence and underwriting checks which were carried out. Those concerns have turned into reality with numerous reports of businesses obtaining loans fraudulently. Since the start of 2022, examples include a caravan company obtaining £50,000 even though it had ceased trading the previous year, a school tuition company fraudulently obtaining £50,000 even though on investigation the company didn’t meet the required criteria, another educational company obtaining a £50,000 loan when it was only entitled to a loan of £10,000 and a car break down business obtaining the full amount which was subsequently spent on funding the director’s drug habit.
The Insolvency Service has been very vocal on its drive to crack down on those directors and companies that have misused the Covid support schemes. Sue Tovey of the Insolvency Service has said “Taxpayers’ money was made available to help genuine businesses get through the lockdown period and where there have been abuses, we will not hesitate to take action”. If misconduct is found, directors can face sanctions, including being disqualified as a company director for up to 15 years or, in the most serious of cases, prosecution.
It is important to remember that bounce back loans are a debt and have terms and conditions attached from the lender. Failure to account for how the bounce back loan was used or using it for personal payments can result in disqualification as a director. In addition, as loan repayments become due following the 12 month repayment holiday, the Insolvency Service is warning that there may be an increase in directors and debtors considering formal insolvency, amongst other things to avoid repayment of the bounce back loans.
It seems inevitable that we will see a large number of insolvencies of businesses which have abused this lifeline and consequential litigation by insolvency officeholders could keep the Courts busy for years to come.