This article, written by Faye Griffiths and Jeremy Asher of Setfords, discusses what directors and former directors of companies need to know about Bounce Back Loans, specifically where they relate to insolvency and the potential for Cifas markers.
The latest statistics published by the Government show that out of £46.6 billion paid out to borrowers under the Bounce Back Loan Scheme, a staggering £1.8 billion has been flagged by lenders as ‘suspected fraud’. Those monies are guaranteed by the government and therefore represent taxpayer monies, so it is understandable that banks and certain government bodies will continue to utilise every avenue available to them to try and recover those loans from errant directors.
At Setfords, we are seeing an increasing number of enquiries from directors relating to companies that are either in financial distress and have concerns around an outstanding Bounce Back Loan, or where the directors are now facing misfeasance claims from liquidators relating specifically to those Bounce Back Loans. In some cases, we are also seeing clients who are (quite rightly) questioning advice given to simply walk away and to allow their companies to be struck off and dissolved by Companies House. Whilst legal advice on such matters will always be fact specific, in most cases this is unlikely to be the most appropriate course of action, and directors should be cautious when seeking advice as to the closure of a company by way of dissolution.
The misuse of the Bounce Back Loan Scheme is typically reflected as:
- Those who applied for a Bounce Back Loan despite not satisfying the qualifying criteria (for example, by overstating the actual turnover figure); and
- Those who were eligible to apply for, and received, a Bounce Back Loan but who are guilty of misusing the funds once received (for example, to cover personal expenses).
If a company is unable to repay its Bounce Back Loan and either enters into a formal insolvency process or is dissolved, there could be serious consequences for those who have fraudulently obtained or misused monies advanced from the Bounce Back Loan Scheme. At a minimum, directors will likely face investigations from a subsequently appointed liquidator who will look at why the loan was obtained, whether the borrower qualified for the amount borrowed, and how those funds were used. The potential consequences arising from the abuse of the Bounce Bank Loan Scheme include:
- Personal liability (for example, arising from misfeasance claims pursued by a liquidator);
- Disqualification as a director following investigations undertaken by the Insolvency Service;
- Criminal proceedings and imprisonment; and
- Personal bankruptcy restrictions.
For directors of companies that have outstanding Bounce Back Loan and where the company may become insolvent, it is imperative that they seek legal advice at the earliest possible opportunity to address the potential issues, personal liability, and consequences that may arise from historic actions and the decisions that are made during this critical period.
What if my company is now dissolved?
For directors who are considering dissolving, or have already dissolved, their companies and where there are Bounce Back Loan outstanding, this does not release them from potential investigation and personal liability. In December 2021, the government introduced the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, which enables the Insolvency Service to investigate the actions of directors of dissolved companies with a view to taking steps to pursue those individuals personally. In short, directors will not escape potential personal liability if they simply allow the company to be dissolved in an attempt to avoid discharging liabilities.
CIFAS Markers – what are they and how may they apply?
In addition to those outlined above, a lesser-known consequence of a Bounce Back Loan default is a Cifas marker. CIFAS (the ‘Credit Industry Fraud Avoidance Scheme’), operates national fraud prevention databases which are relied upon by banks and financial institutions in the UK to protect against fraud and where participating organisations can exchange details of applications that are considered to be fraudulent or suspicious.
Directors of companies who have defaulted on their Bounce Back Loan will often have Cifas fraud markers loaded against them personally, meaning they will be blocked from obtaining credit for 6 years. Those companies that go into liquidation may also find that their directors are blacklisted from obtaining credit on the basis of losses caused to the banks and the government under the Bounce Back Loan Scheme. Cifas markers circumnavigate the fact that personal guarantees were not required for Bounce Back Loans, and get behind the limited liabilities usually provided to directors of limited companies. For those individuals working in the financial services sector, a Cifas marker will likely have a detrimental impact on careers and job prospects.
However, there have been many hard luck stories. The banks were given little guidance on how to interpret the rules set out by the British Business Bank when launching the Bounce Back Loan Scheme. As a consequence, we have seen some dubious decision making when default notices and Cifas markers have been issued on the basis of scant evidence or poor judgement by the banks’ investigators. We have seen reputations and personal relationships reduced to tatters and otherwise strong businesses pushed into oblivion. Challenging such decisions is a difficult, technical, and specialist area of law.
If you are a director (or former director) of a company with concerns over any aspects of your company’s financial position and have an outstanding Bounce Back Loan, it is important you take legal advice before making any decisions. Please do get in touch with us to discuss your situation confidentially.
Faye Griffiths (Senior Consultant Solicitor – Insolvency and Restructuring)
Jeremy Asher (Senior Consultant Solicitor – Regulatory)