Bounce Back Loans – the Never Never Payday
By Alison Kirby, Manolete Partners Associate Director for the East of England
‘If you would know the value of money, go try and borrow some.’: Benjamin Franklin.
Bounce Back Loans (“BBLs”) were part of the smorgasbord of measures deployed at great speed, and thus coincidentally with very little oversight or due diligence, by the UK Government in their urgent response to support businesses affected by the emerging pandemic in the spring of 2020. The ease with which businesses, both deserving and otherwise, were able to access BBLs, led most in the insolvency profession to wonder how this would pan out at a later stage – with scarce sign of Benjamin Franklin nor his pithy remarks in the minds of those lending.
With thanks to the recent R3 Technical paper, the fundamental features of BBLs are thus:
In usual circumstances there is no security from the Borrower (Corporate entity) to the Lender (Bank);
The Lender is, and was able, to rely on the self-certification of the Borrower’s compliance with the eligibility criteria and is not required to verify most of those criteria;
In an insolvency, the Lender is an unsecured creditor to the extent of the failure to pay back the BBL;
Loans can be from £2,000 to £50,000, being 25% of turnover or £50,000, whichever is less.
Although the difficulty with which a winding up order can be obtained during the pandemic has dramatically slowed court insolvencies, out of court insolvencies have continued and Manolete has seen a marked increase in enquiries for litigation support relating to BBLs.
The purpose of BBLs was to support trading or commercial activity, specifically they were not for personal use. That said, for an SME whose director is only paid a modest salary from the business and who has no other income, that has be allowed: surely?
Use of the BBL must be case specific. I have recently received several new enquiries where the BBL has been a source of some interest and all were the maximum £50,000 outstanding. I always review the bank statements to understand how the business worked, for example, the pattern of cash and trade payments including those to the director and any connected entities. Red flags were raised at the following:
Increase in the amount and frequency of payments to the director, in a few months withdrawing for personal benefit alone the BBL with amounts drawn being significantly in excess of previous payments;
Payments to a connected landlord at a time when other creditors are not being paid;
Extraction of the whole sum to a connected entity on same day of receipt of BBL, noted on the reference as ‘loan’;
Change in pattern to expenditure with hugely increased (daily not weekly) cash extractions via ATM to a maximum of £500 per day.
These identify in a number of different heads of claim (breach of duty/preference/TUV). The quantum of a breach of duty claim in the circumstances where the whole is extracted for the benefit of the director, is the amount of the BBL. This is on the basis that the Director increased the corporate entity’s liabilities by the amounts of the loans and in breach of duty applied the BBL to the director’s own benefit.
While BBL claims alone are modest in value, Manolete welcomes claims from £20,000 with no maximum claim size.