Did You Use Your Company’s Bounce Back Loan Correctly?
Bounce Back Loans (BBL) were introduced in response to the economic challenges arising from the COVID-19 pandemic. The scheme aimed to provide financial support to businesses by offering them low-interest loans with relaxed eligibility and a simple application process.
Firstly, it is crucial to acknowledge that the vast majority of business owners who received a BBL used them as intended; to support their companies during those challenging times. The loans undoubtedly provided a lifeline to many, enabling them to retain their workforce, cover essential expenses, and navigate the uncertainties caused by the pandemic.
Companies not using bounce back loans as intended fall into two categories:
- Those who deliberately and fraudulently took out loans
- Those who mistakenly misused the loans
In the first category, there are plenty of examples of individuals who set up new companies with the sole intent of claiming a BBL knowing they would never use the money as it was intended. These individuals are quite rightly being pursued and will face the full weight of the law.
One notable example is the case of Richard Milleman, the founder of London-based luxury jeweller, Milleman Jewellery Ltd. He fraudulently claimed £50,000 in bounce back loans, despite being in a dire financial state before the pandemic. Milleman used the funds to purchase a luxury car and draft new business proposals. In February 2021, he pleaded guilty to fraud and was sentenced to 14 months in prison.
Another prominent case involves fraudsters Gurjeet Chadda, Naweed Khan, and Shashi Rani. They created multiple fake companies and fraudulently obtained over £3.8 million in bounce back loans. This money was then transferred overseas and used for luxury holidays, gambling, and other personal expenses. In July 2021, all three were convicted of money laundering and fraud, receiving sentences ranging from 30 months to 6 years in prison.
Simply put, these individuals have stolen off us all, as tax payers.
It is the second category that is of most interest here; those that have mistakenly misused their bounce back loans. However, this only really becomes relevant if the company in receipt of the loan gets into financial difficulties and becomes insolvent because this when the finances of the company will be studied.
If a limited company gets into financial difficulties such that closure becomes the only option, then there are two main ways in which the company can be closed:
- To dissolve the company
- To liquidate the company
Dissolving a company
The company director/s can apply to Companies House to have their company dissolved. It’s a fairly straight forward process with a nominal administration fee. One key responsibility the director has when dissolving their company is to inform any creditors (people or companies their company owes money to) of their intention to dissolve the company. It should be pretty obvious that any creditor would oppose the dissolution until they had received monies owed to them. So, in effect, you can’t dissolve a company with debts. Dissolving your company without informing creditors means the director has broken the law. Creditors will find out and they can then apply to have the company re-instated and often pursue the fraudulent directors personally for the debt. Companies that received a BBL and have subsequently been dissolved are actively being investigated by the authorities and slowly, but surely, directors of these companies will be receiving an unpleasant knock on their door.
Liquidating a company
Company directors must appoint a Licensed Insolvency Practitioner (IP) to liquidate their company if it’s insolvent (it can’t pay its debts).
If the company received a BBL that hasn’t yet been repaid, the IP will ask for proof that the money had been spent on legitimate business expenses. Basically, was the money spent supporting the company and allowing it to survive through lockdown? An example of proof would be transactions on the company’s bank statement.
Where the IP wasn’t satisfied that all the BBL money had been spent correctly, they would ask for the money to be repaid by the director. Technically it would be seen that the company had lent the director the money, in other words the ‘director’s loan account’ was overdrawn.
A BBL has no director personal guarantee so if a company goes into liquidation, still owing some of its BBL but can demonstrate the money was spent correctly, the debt would disappear with the liquidation of the company. On the other hand, if it can’t be proven the money was spent correctly then, as part of the liquidation, the director will be pursued for the money.
Hopefully, this article has demonstrated how important it is to have spent any BBL received by your company correctly and the consequences of not having done so. In addition, it should also have dispelled the myth that a director can dissolve their indebted company, hoping no one will notice, and that the debts will simply disappear in a puff of smoke. They
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What does this mean to me?
Are you considering applying to dissolve your company? Are you hoping the Bounce Back Loan balance you haven’t repaid will somehow disappear and you won’t have to pay the money back?
Simply put – don’t dissolve your company whilst it still has debts. Dissolving a company without informing anyone the company owes money to is against the law. If you do this you can be prosecuted and the company can be reinstated and you can be pursued for the money.
Do you want to appoint a Licensed Insolvency Practitioner to put your company into liquidation because the company cannot pay its debts? This is the correct way to close a company if it has debts.
Remember, if one of the debts is a Bounce Back Loan, you will need to prove that the Bounce Back money was spent on legitimate business costs. If you can’t, you might need to repay the money personally. In accounting terms this is known as an ‘overdrawn director’s loan account’.
Don’t guess what is the right or legal thing to do, please get in touch so we can try and help you avoid breaking the law and possibly becoming personally responsible for your company’s debts. We don’t charge for our initial advice, which is confidential and friendly.