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Bounce Back Loans

Guest article by Adrian Edmonds

To Bounce Back or Not to Bounce back?

Our Insolvency Specialists Remind Directors not to Overlook their Fiduciary Duties When Taking Out Loans

As has been widely reported, since the Government announced the launch of the Bounce Back Loan Scheme on 1 March 2020, 460,000 businesses have taken advantage of the scheme. Borrowing has totalled c.£14 billion. Many business owners are looking at the favourable terms of the loans and can see a way back to profitability. But some businesses may be merely “kicking the can down the road” and delaying insolvency and the inevitable downfall of their business.

In this article, my colleague Clive Fortis, a director at Antony Batty & Partners Insolvency Practitioners, based in our Salisbury office, looks at the risks to Company Directors of taking out such a loan.

Bounce Back loans are “self-certifying”. Loans are being agreed and paid into business accounts in a matter of days. It is no wonder, therefore, that the system is open to abuse. However, it is important to note that the loans do need to be repaid and that Directors do not overlook their fiduciary duties.

Wrongful Trading has Been Relaxed, But Most Directors’ Duties Remain in Place

At present, the rules concerning wrongful trading have been relaxed. However, directors need to consider several other possible breaches should the company become insolvent in the future. Also, it is important to remember that the loan is not designed to allow directors to “tidy” their own position within the company by eliminating Directors’ loan accounts or to reduce overdrafts where there are personal guarantees.

When considering any form of funding, directors should document the reasons behind taking out the loan. (This may be to complete on-going projects.)

Additional breaches of insolvency legislation, outside wrongful trading (subject to investigating by the Insolvency Practitioner) are:
  • Fraudulent trading (Insolvency Act (IA) 213/215)
  • Transactions in fraud of creditors (IA 207)
  • Misconduct in course of winding up (IA 208)
  • False representation to creditors (IA 211)
  • Summary remedy against delinquent directors, liquidators etc (IA 212)

This section applies if, during the winding up of a company, it appears that a person who:

  1. Is or has been an officer of the company,
  2. Has acted as liquidator or administrative receiver of the company, or
  3. Not being a person falling within paragraph 1) or 2), is or has been concerned, or taken part in, the promotion, formation or management of the company…

… has misapplied or retained, or become accountable for, any money or other property of the company, or become guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.

  • Transactions at an undervalue.
  • Preferences.
  • Misfeasance.

Take Caution When Applying for Bounce Back Loans

These loans are there to assist business, but take caution when applying for them.

Clive Fortis comments:

 “There is plenty of government financial support to assist businesses moving forward. However, consideration has to be given to the fact that Bounce Back loans and CBILS will need to be repaid. This will inevitably cause pressure points in 12 months’ time.”

The advice from our insolvency specialists is to always seek professional assistance before applying and document the reasons considered by the business when taking out the loan.

Adrian Edmonds, Anthony Batty & Company LLP www.antonybatty.com

By John Hawkey

John is the founder and owner of Freeforumofideas.com.