Contractors, sorry, but there’s little wriggle room for BBL recipients who overdrew dividends

As one of those insolvency practitioners accused (or at least rumoured) of acting on a commercial basis, I can confirm that commercials are indeed the basis on which we act, not least because legislation in this area is quite rigid, writes Gareth Wilcox, partner at Opus Restructuring & Insolvency.

This focus on how we insolvency practitioners interact with limited company directors has come about because, potentially long-forgotten by the covid unaffected, Bounce Back Loans (BBLs) are now falling due for repayment.

Why are Bounce Back Loans a big issue right now?

As most PSC contractors will remember, the BBL scheme commenced at the heart of the coronavirus pandemic -- May 2020, with the government covering the interest for the first 12 months. This being the case, government support for interest payments has now run out for the earliest BBL recipients.

So directors of companies with such loans have reached the point where they must consider whether they are able to make repayments. Or risk making their company’s financial position worse if they are unable to repay the BBL.

Further, while the prohibition on creditors issuing statutory demands and presenting winding-up petitions has been extended to September 30th 2021, there has been no word from the government on extending the ‘wrongful trading’ suspension. 

So from July 1st 2021, directors allowing the financial position of their company to decline could find themselves personally liable for worsening losses.

But Bounce Back Loans are backed by the government, aren’t they?

Yes they are. The government has provided lenders with a 100% guarantee. 

The key here, however, is that the guarantee is in favour of the lender, as is made clear under the British Business Bank’s FAQs. In addition, as the FAQs also make clear, businesses which took a BBL remain 100% liable to repay the full loan amount, as well as interest, after the first year.

In practical terms, this means that the lender must seek to recoup the funds from the company in the first instance, and will only be able to claim from the government when they have failed to do so.

What do these strict terms mean for limited company directors?

The implication is that directors of companies who have not yet started to repay their loans or contact their lenders regarding repayment, are likely to hear from their bank’s debt collection department before too long.

It has already been reported that banks have begun writing to customers to remind them that interest payments are starting to accrue. The banks are also investing significantly in debt recovery, in order to seek to recoup a mega £46.5 billion paid out in BBLs.

What if my limited company can’t pay back its BBL?

Not being able to pay is unfortunately likely to be the case for a substantial number of companies. If that’s you, consider that directors may:

• extend the term of a loan to 10 years;
• move to interest-only repayments for a period of 6 months (on up to 3 occasions);
• pause repayments for a period of 6 months if you have already made at least 6 repayments (once).

If there is no likelihood of a recovery in the company, however, the above measures are likely to be of little comfort, and directors may conclude that there is no alternative but to close their company.

Is it right that a company can be forced to close purely because of the pandemic?

Put to me more than once – face-to-face, this is a difficult question to answer! But the truth is that the legislation surrounding company and insolvency law is very rigid, with little margin for interpretation. 

Broadly speaking, a company is insolvent if (either) it cannot pay its debts when they fall due, or the value of its liabilities exceed the value of its assets.

Since a Bounce Back Loan is a company liability, the loan must be included when determining solvency -- or otherwise -- regardless of the government guarantee.

This is a key point, and the reality is that banks are unlikely to be able to claim from the government until they can evidence their own attempts to have recovered the loan, and that those attempts have been unsuccessful. A little problematically (at the time of writing), it is unclear exactly what steps a bank will be required to take before the government will pay out.

What can a bank actually do?

Since the Bounce Back Loan is a facility between the bank and the borrower, this can be recovered in accordance with the lender’s terms like any other debt.

Once the prohibition on presenting statutory demands and winding up petitions for debts arising out of (or in businesses affected by covid-19 on September 30th 2021) has passed, a bank’s ultimate tool will be to seek the compulsory winding-up of defaulting companies.   

If facing a default, directors will be well-served by taking legal advice, or speaking to an Insolvency Practitioner as to their circumstances and whether it may be preferable to consider a Creditors Voluntary Liquidation rather than awaiting a petition.

What are the consequences of liquidation?

It is worth factoring in that a limited liability company has its own legal personality, and shareholders benefit from that limited liability. As such, a director can take comfort in the fact that if they have done nothing wrong, in theory, a limited company they are appointed over going into liquidation ought not to be the end of the world.  Directors should however make themselves aware of the consequences of liquidation.

I have covered certain of these consequences in previous articles for ContractorUK, but broadly speaking this will result in an investigation into the circumstances leading to the insolvency of the company (which is likely to include scrutinising the decision for the loan to be applied for), in relation to both assessing the availability for ‘antecedent recoveries’ and whether ‘disqualification proceedings’ ought to be brought.

A director is also prohibited from being a director (or involved in the formation, promotion or management) of any other company with a ‘similar name’ with potential civil and criminal consequences for doing so.

Last but not least, there is also the matter of the so-called ‘dividend trap’ which I have previously covered that arises where amounts are drawn as dividends, which are in excess of reserves.

What is the risk of action being taken against me?

The precise action will depend on individual circumstances. I have heard (anecdotally) of BBLs being spent on various non-company assets, such as properties, vehicles, and clearly where a demonstratable fraud or other improper application of Bounce Back Loan proceeds has occurred, action is likely to be taken either by an appointed liquidator or the relevant lender.

However what remains to be seen is what action will be appropriate where directors find themselves inadvertently in contravention of company or insolvency legislation, such as if they have carried out antecedent transactions (such as transactions at undervalue or unfair preferences) or drawn dividends in excess of reserves during the pandemic.

As is the case for any other person engaging in litigation, a liquidator must always have in mind the fact that judges have the power to make any order they see fit. This, combined with the inherent likelihood of there being limited funds in an insolvent estate, means that a liquidator must consider that they have a very good chance of success before antecedent recovery proceedings will be brought for unfair preferences or transactions at undervalue. It must be said however, that these claims are always brought with the benefit of hindsight and yes (in answer to those rumours I mentioned at the outset) -- on a purely commercial basis.

Antecedent claims can be complex, and most involve some assessment of the director’s thinking at the time a particular transaction took place, such as when considering ‘desire’ in an unfair preference action, or what might be considered ‘significantly less’ in the case of a transaction at undervalue.

Are you a dividend over-drawer? If so, expect little wriggle room

Clearly, it will still be some time before it will be possible to identify a pattern of behaviour among judges with such ‘post-pandemic’ claims being brought. But directors will certainly hope that judges will exercise discretion in the circumstances. 

Less discretion may be available, however, where dividends have been taken in excess of reserves, since such claims represent a debt which is recoverable and is due to the company. It must be said that there is little wriggle-room here, either the sum is due or it isn’t, with no forbearance available in light of the pandemic.

In all cases, it would be prudent for directors of potentially insolvent companies to take professional advice before embarking on any course of action. There are series of narrow options available if not lurking here, most of them far from what people like contractors go into business to explore, but exploring them alone really can be a fool’s errand.