Bounce Back Loan recovery following insolvency or liquidation
Bounce Back Loans
Bounce Back Loans were established as part of the Governments' Covid Support schemes. These loans of up to £50,000 were popular emergency finance options for businesses during the pandemic period. With no repayments or interest to pay for 12 months from commencement, and a low fixed interest rate of 2.5%, ‘Covid Loans’ offered some certainty when business cash flow was in dire need of support.
According to data provided to the Department for Business, Energy & Industrial Strategy (BEIS) around £46.6 billion of BBLs were made, with only £4.7 billion fully repaid by mid-2022. It is estimated that perhaps £3.5 billion of the loans were obtained by fraud.
A key feature of the Bounce Back Loan Scheme (BBLS) was the government’s guarantee to repay lenders 100% of outstanding loan amounts if their borrower went bust.
This offered lenders confidence to release funds in the unprecedented circumstances of the global pandemic, while also meaning company directors did not have to provide a personal guarantee for borrowing under the scheme.
Bounce Back Loans and insolvency or liquidation
It is important to note that a company with a Bounce Back Loan will remain liable for unpaid loans when insolvent.
The government guarantee only applies to the lenders themselves, whilst the borrowing businesses continue to be fully liable for repayment of the loans. The government guarantee is being increasingly called into play, however, due to the various financial difficulties that businesses are experiencing.
A further problem for the government is that some directors have used an unofficial method of closing their limited company that is only intended for solvent businesses known as ‘strike off’. For this reason, new legislation has been brought in to limit the way in which businesses can close if they’re running an outstanding Bounce Back Loan or when they owe tax to the Treasury.
It effectively extends the penalties that are already in place when companies undergo formal liquidation, and when directors are found to have committed some form of wrongdoing.
Bounce Back Loan Fraud and Insolvency
In most circumstances, liability for repayment of a Bounce Back Loan will fall on the company, and the Directors would not be personally liable. However, in some cases, particularly those involving fraud, Directors may have personal liability, depending on the actions taken by the company leading up to the insolvency or liquidation.
Aleksander Staskiewicz, 35, from Southampton, was sentenced to eight months imprisonment at Southampton Crown Court on 17 August 2023, for offences contrary to the Fraud Act 2006 and the Companies Act 2006.
Staskiewicz applied for a £20,000 Bounce Back Loan in May 2020 when the country was in lockdown. However, his company Think Gas Ltd had already been in financial difficulty before the pandemic had struck, and he had considered closing it down.
Instead, he overstated his company’s turnover in his application for the government funding and withdrew £19,600 the day after the loan was deposited in the company account. The day after this, he applied to close down his company by having it struck off from the Companies House register.
The striking-off application to dissolve a company makes clear that creditors, such as a bank with an outstanding loan, should be notified within seven days of applying to close the business, and that failure to notify interested parties is a criminal offence. Staskiewicz did not inform his bank.
The company’s affairs were investigated by the Insolvency Service after counter-fraud systems flagged the likelihood that fraud had occurred.
Attempting to avoid a custodial sentence, Staskiewicz told the court that he hoped to repay the loan money back within 12 months. However, he had made no effort to repay the loan in the past three years.
Staskiewicz pleaded guilty at Southampton Crown Court on 20 July 2023 to Fraud by misrepresentation contrary to sections 1 and 2 Fraud Act 2006, and Failure to notify creditor of a strike off application contrary to section 1006 Companies Act 2006].
Bounce back loan recovery options for Insolvency Practitioners
Insolvency litigation may be used as a method of Bounce Back Loan recovery for lenders. Insolvency litigation funding allows businesses and individuals with an insolvency case the opportunity to pursue it without having to worry about the associated legal fees.
Most insolvency practitioners will be familiar with terms such as CFA and ATE, and some will have come across third party litigation funding too. But very few would ever claim to be completely up-to-speed with the latest funding options that make life easier for IPs and can massively impact on recoveries.
But first the basics: Pursuing litigation under a conditional fee agreement (CFA) means asking law firms to defer their fees until the successful conclusion of a case, when the creditors, IP and lawyers can be paid from any recovery made.
After the event (ATE) legal expenses insurance protects the IP from the risk of having to pay the opponent’s legal fees in any unsuccessful litigation.
Third party funding in insolvency is most commonly associated with either acquiring the litigation rights or funding all of the legal fees in exchange for a share of the monies recovered.
Annecto Legal provides assistance to IPs to make sure that they enter into appropriate retainers with their legal advisors (see Stevensdrake V Stephen Hunt for the risks here: a liquidator personally liable for CFA costs of £1m) and to secure ATE and funding that meets the needs of the case.
Things to think about:
- Does the third-party funding extend to Insolvency Practitioner fees?
- Is initial litigation finance needed to do further investigations or perhaps to get a KC opinion?
- What does the ATE insurance actually cover?
- Does the litigation funder unfairly benefit from early settlement?
- Or are funder’s returns staged so that creditors benefit from early settlement?
- Does the ATE offer effective discounts for early settlement?
There is obviously a lot more than this to consider in any funding agreement, but Annecto Legal is well versed in assisting IPs and can guide you through each step of the process – making sure the best deal is achieved for all parties.
Why Annecto Legal?
The team at Annecto offer free advice to enable insolvency claims to be explored and, if applicable, progressed to the stage where they are funded and insured. Furthermore, we have access to a large network of specialist solicitors with experience in all areas of commercial litigation – major and niche alike.
Our services represent the best opportunity for insolvency practitioners to recover assets on behalf of creditors.
Are you an insolvency practitioner or solicitor looking to explore a debtor’s litigation claim? Talk to one of our experts today.
David Law (+44) 7540 303035 or email email@example.com
Mark Beaumont (+44) 7730 217 643 or email firstname.lastname@example.org