Bounce Back Loan liability – not just for fraudsters

With news of the largest individual bounce back loan (BBL) fraud identified thus far, a £10m scheme perpetrated by fraudsters with a network of 200 shell companies, you might assume that liability is only likely to arise in similarly serious circumstances. You would, unfortunately, be wrong.

A total of £47bn BBLs were granted, with estimates from the National Audit Office suggesting that approximately 10%, or £4.9bn, of BBLs were obtained fraudulently or in breach of the criteria.

These are the key eligibility criteria for a company to obtain a BBL:

• The business must have been engaged in trading or commercial activity at the date of the application
• More than 50% of the business’ income must be derived from this trading activity
• The BBL does not exceed 25% of the company’s annual turnover up to a maximum of £50,000
• The business and its turnover has been adversely affected by Covid-19

While this was publicised widely at the time and would have appeared amongst BBL terms and conditions, high street banks and lenders were quick to create systems and portals to streamline application procedures. Commonly, the criteria above appeared as nothing more than a check box confirming ‘I am eligible’ and no specific advice was provided by the lenders involved.

For those companies who obtained a BBL in breach of the eligibility criteria, the loan is technically in default. The lender can then require immediate repayment of the outstanding balance and the interest due to be paid by the government. Directors can also incur a personal liability for having acquired a BBL in breach of the above.

Ignoring the criteria itself, a director or shareholder can also incur a liability if the loan is not drawn from the company appropriately. This can include:

• Where the funds are withdrawn by a shareholder in lieu of dividends and in breach of the requirements of the Companies Act 2006
• Where the funds are withdrawn by a director as remuneration not in accordance with the company’s articles of association and not declared as salary, creating an overdrawn director’s loan account
• Liability for breach of duty or misfeasance – acting in bad faith – as a director where the property of the company (including the BBL funds) is applied other than for the benefit of the company (i.e. where the funds are applied or drawn for the benefit of the director).

The potential liability above is not affected by the moratorium against liability for wrongful trading, which was active between 1 March 2020 and 30 June 2021, introduced by the government to considerable fanfare at the time.

With the recent introduction of The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act, which grants the Insolvency Service powers to investigate companies which have already been dissolved, it is likely that the conduct of directors will remain under the spotlight as the government take steps to recover funds lent during the pandemic.