Insolvency Practitioners Duties Regarding Bounce Back Loan Abuse!

[Lisa Thomas]

I've had 2 calls with two different directors this week where both companies were hopelessly insolvent as at 31.12.19 yet they both took BBLs contrary to the terms. One director then took the bulk of the money out in a lump sum for themselves. I seem to be having identical conversations every time I pick up the phone...!

 

[IanSuth]

I've had 2 calls with two different directors this week where both companies were hopelessly insolvent as at 31.12.19 yet they both took BBLs contrary to the terms. One director then took the bulk of the money out in a lump sum for themselves. I seem to be having identical conversations every time I pick up the phone...!

From memory of how the business i was in was doing then (recruitment), we were all finding that there was a dearth of new work whilst everyone waited on the Brexit deal. All the clients were telling us they were desperate to take on staff but HR or Finance had imposed a hiring freeze whilst they waited to see what would happen. On paper we were losing money but had a genuine expectation that there was lots of business just around the corner - in fact Jan 19 we took lots in instructions it was just few were completed before lockdown and we only got to invoice when people start

I guess there were other similar industries where owner Directors (who are naturally optimistic people) would at the time have thought it was a temp blip hey could trade out of

 

[tan_lan]

@IanSuth I think thats true.

But what separates the above scenario and these disqualifications seems to be:

1. Misrepresenting turnover to obtain a higher loan amount.
2. Withdrawing the money as the earliest opportunity!

 

[jimbof]

I've had 2 calls with two different directors this week where both companies were hopelessly insolvent as at 31.12.19 yet they both took BBLs contrary to the terms. One director then took the bulk of the money out in a lump sum for themselves. I seem to be having identical conversations every time I pick up the phone...!

Which term of the BBL specifically do you think they were in breach of?
I think the only issue around the 31st Dec 2019 was that if they were a business in difficulty (which I think is a highly technical definition) they could only have received a certain amount of state aid.
I don't think there was anything that made such an application against terms.

 

[Lisa Thomas]

Neither business self declared they were in difficulty. In these cases both companies were hopelessly insolvent. In addition they breached this term:

"The business must confirm to the lender that the loan will only be used to provide an economic benefit to the business, for example providing working capital, and not for personal purposes."

 

[Mark T Jones]

Neither business self declared they were in difficulty. In these cases both companies were hopelessly insolvent. In addition they breached this term:

"The business must confirm to the lender that the loan will only be used to provide an economic benefit to the business, for example providing working capital, and not for personal purposes."

Oh bugger.

I spent mine on a car!

 

[IanSuth]

Oh bugger.

I spent mine on a car!

Well if you use it for Uber or deliveries that is a business purpose

 

[ChrisCallaghan]

I've had 2 calls with two different directors this week where both companies were hopelessly insolvent as at 31.12.19 yet they both took BBLs contrary to the terms. One director then took the bulk of the money out in a lump sum for themselves. I seem to be having identical conversations every time I pick up the phone...!

Ditto Lisa. It feels like the majority of my new enquiries recently are one man band operations that had already ceased to trade before they took out BBLs, and then spent it all on personal living expenses. Very rare that I speak to someone in this scenario who has paid themselves through PAYE. It seems very few directors have considered that they were likely taking illegal dividends / creating overdrawn directors loan accounts. Since coming back from the Xmas and New Year break I've been giving out a lot of bad news to directors!

 

[Lisa Thomas]

Yes its very much rinse and repeat advice this week. I should record it and press play next time...

 

[UK Contractor Accountant]

6 Yrs Disqualification for this one - came back for second bite of the Cherry! easy hanging fruit and all that.

Between 24 June 2020 and 19 November 2020, ADM (“Mr M”) caused EF Ltd (“E”) to breach the terms of the Bounce Back Loan (“BBL”) scheme and to use £49,136 obtained from the scheme for his own benefit rather than for the economic benefit of E,

in that: On 22 June 2020, Mr M, on behalf of E, applied for a Bounce Back Loan of £40,000 and E received this on the same date. The terms of the loan stated that the monies should be used for the Authorised Purpose being for the purpose of working capital or investment to provide an economic benefit to the business or for refinancing of an existing facility.

Between 24 June 2020 and 27 June 2020, Mr M transferred a total of £42,916 to his personal bank account, of which at least £39,136 was BBL monies.

On 18 November 2020, Mr M caused E to obtain a top-up to the BBL of £10,000. On 19 November 2020, just one day later, Mr M transferred this money to his personal bank account. Mr M has failed to explain these transactions. At liquidation on 22 March 2021, E’s only creditor was the bank in respect of the BBL of £50,000.

 

[jimbof]

Is a disqualification the only thing being dished out in these cases? Seems like hardly a big deal given they're most likely not going for Small Business Person of the year award.

 

[tan_lan]

Also, are these directors agreeing to these disqualifications or are they challenging them in court.

 

[Lisa Thomas]

Is a disqualification the only thing being dished out in these cases? Seems like hardly a big deal given they're most likely not going for Small Business Person of the year award.

They have the power to issue compensation orders as well. I suspect in many of these cases, it is being left for the Liquidator to purse, or they have determined the Director does not have funds/assets to pay. Many directors are going Bankrupt to avoid repayment.

See here;

 

[Lisa Thomas]

Also, are these directors agreeing to these disqualifications or are they challenging them in court.

They are usually given a lower disqualification period if they agree to a voluntary disqualification.

 

[tan_lan]

Is says a lot when people plead guilty!

 

[IanSuth]

What is the actual effect of a disqualification if you go back to normal paid employment ?

 

[Lisa Thomas]

What is the actual effect of a disqualification if you go back to normal paid employment ?

Nothing, unless your employeer/contract has some strange problem with it.

 

[IanSuth]

Nothing, unless your employeer/contract has some strange problem with it.

That was my thought

So all the stories i hear of people with PSCs who used those entities to claim BBB even though due to IR35 they had basically abandoned them as vehicle for working through anyway will basically have no meaningful sanction against themselves.

Remember the IR35 rules kicked in Apr 2021 and companies started shifting people to PAYE temp, umbrella or perm roles from the previous Apr onwards (the original implementation date) generally as contracts needed renewal

 

[UK Contractor Accountant]

Like to believe if the Director has equity in a property that the IP is using leverage to get a settlement on repayment of the BBL fraud money.

Do IP's have to report to HMRC if the Director Loan relating to BBL money taken is written off and not collected so it gets taxed as income?

 

[Lisa Thomas]

That was my thought

So all the stories i hear of people with PSCs who used those entities to claim BBB even though due to IR35 they had basically abandoned them as vehicle for working through anyway will basically have no meaningful sanction against themselves.

Remember the IR35 rules kicked in Apr 2021 and companies started shifting people to PAYE temp, umbrella or perm roles from the previous Apr onwards (the original implementation date) generally as contracts needed renewal

That depends. They might be bankrupted, disqualified, have a compensation order issued, and/or pursued by an IP but if they have nothing to lose whatsoever then yes, they could 'get away with it.'

 

[Lisa Thomas]

Like to believe if the Director has equity in a property that the IP is using leverage to get a settlement on repayment of the BBL fraud money.

Do IP's have to report to HMRC if the Director Loan relating to BBL money taken is written off and not collected so it gets taxed as income?

We have to report a director to HMRC if there has been covid fraud and HMRC may ask what happened as regards any DLA outcome, but we do not specifically have to notify HMRC about DLA's in the sense that it should be recorded as Director income - that will be down to the directors to disclose in the normal way.

 

[japancool]

Send them to work in the slave mines!

 

[UK Contractor Accountant]

e do not specifically have to notify HMRC about DLA's in the sense that it should be recorded as Director income - that will be down to the directors to disclose in the normal way.

Do you make Directors aware, when you write to them stating that you are longer pursuing repayment of Director Loan monies, that they need to declare as income on their tax return?

 

[Lisa Thomas]

Do you make Directors aware, when you write to them stating that you are longer pursuing repayment of Director Loan monies, that they need to declare as income on their tax return?

No. We do not give personal tax advice to Directors. Maybe some other IP's on here @Gavin Bates @Chris Parkman @Chris Callaghan take a different approach?

 

[frank759]

To be clear though, all of this only applies to Ltd. companies.

If its a sole trader then it never gets to the Insolvency Service / Liquidator at all - the worst that will happen is is a potentially negative credit file (as discussed at https://www.ukbusinessforums.co.uk/threads/sole-trader-bounce-back-loan-implications.414744/page-2)

 

[japancool]

If its a sole trader then it never gets to the Insolvency Service / Liquidator at all - the worst that will happen is is a potentially negative credit file (as discussed at https://www.ukbusinessforums.co.uk/threads/sole-trader-bounce-back-loan-implications.414744/page-2)

I don't see where that was determined. What's to stop the bank from making the creditor bankrupt?

 

[frank759]

The process is here and they don't need to

Sole trader bounce back loan implications

I’ve no idea. It makes perfect sense though, from a practical point of view. Forcing tens of thousands of extra companies through the Insolvency Service in the space of a few months would be logistically impossible.

www.ukbusinessforums.co.uk

 

[UK Contractor Accountant]

This one is staggering in the level of BBL fraud and how lax one Bank was in carrying out basic ID checks.

"Cameron Brown QC, has successfully prosecuted two men who headed up an international money laundering network, responsible for laundering over £70 million.

£10m of that laundering came from fraudulent Bounce Back Loans, in what is believed to be one of the largest ever Bounce Back Loan frauds, following the introduction of the government backed pandemic business loan scheme in 2020.

AT, 38, from Russia and DG, 44, from Lithuania, were the focus of a four-year investigation which began in October 2017 by the Organised Crime Partnership – a joint National Crime Agency and Metropolitan Police Service unit.

While on bail, the pair began to exploit the Government’s Covid-19 support scheme by laundering the proceeds of dishonestly obtained fraudulent Bounce Back Loans (BBL) through the various shell companies they had set up. Between June 2018 and November 2020, when the pair were arrested again, they had laundered a further £34m, including the £10m generated from the BBLs.

The Fraudsters claimed up to £50,000 of BBL funds each time, generating over £10m in total. £3.2m of that was claimed from one UK bank alone.

 

[ChrisCallaghan]

No. We do not give personal tax advice to Directors. Maybe some other IP's on here @Gavin Bates @Chris Parkman @Chris Callaghan take a different approach?

We take the same stance as you Lisa - we do not give tax advice. Ultimately it's the director's responsibility to disclose it. Interestingly enough, for the first time I've had an accountant chase me for an update about how we've treated a DL so they can declare it on their client's self assessment. Personally I have no idea how it ends up being listed, especially where we've agreed a settlement.

@UK Contractor Accountant I've never heard of HMRC coming after a director for not disclosing DLs as income post liquidation, but info regarding DLs is listed on the Liquidators Report, which is publicly listed at Companies House. So in theory, the info is there if HMRC wish to pursue a director for not declaring it as income.

 

[UK Contractor Accountant]

@UK Contractor Accountant I've never heard of HMRC coming after a director for not disclosing DLs as income post liquidation, but info regarding DLs is listed on the Liquidators Report, which is publicly listed at Companies House. So in theory, the info is there if HMRC wish to pursue a director for not declaring it as income.

Seems to me widespread abuse of not declaring it on Tax Returns as usually by that stage the engaged Accountants have ceased carrying out any further work for the company/Director.

Have seen several cases of Dividends declared on tax returns which the IP's have determined as illegal dividends and chased for repayment. Not sure if the dividends declared ever corrected if a settelment is reached with IP.

 

[Lisa Thomas]

We take the same stance as you Lisa - we do not give tax advice. Ultimately it's the director's responsibility to disclose it. Interestingly enough, for the first time I've had an accountant chase me for an update about how we've treated a DL so they can declare it on their client's self assessment. Personally I have no idea how it ends up being listed, especially where we've agreed a settlement.

@UK Contractor Accountant I've never heard of HMRC coming after a director for not disclosing DLs as income post liquidation, but info regarding DLs is listed on the Liquidators Report, which is publicly listed at Companies House. So in theory, the info is there if HMRC wish to pursue a director for not declaring it as income.

Hi Chris

I suspect it's a minefield for an accountant to sort. I believe it makes a difference as to whether we formally state, on behalf of the company, that the balance has been written off so care has to be taken in our statements/treatment.

 

[ChrisCallaghan]

The process is here and they don't need to

Sole trader bounce back loan implications

I’ve no idea. It makes perfect sense though, from a practical point of view. Forcing tens of thousands of extra companies through the Insolvency Service in the space of a few months would be logistically impossible.

www.ukbusinessforums.co.uk

But they can - "Enforcement action includes petitioning the borrower for insolvency or starting administration proceedings. Enforcement is not expected unless in the event of serious or organised fraud, or borrower refusing to pay but has assets"

I suspect where a sole trader is unable to repay the loan and is also a property owner, then either the BBL lender or British Business Bank will look to threaten the borrower with bankruptcy, which will likely lead to the loss of their property. In these scenarios the sensible advice would either be to remortgage or sell their property to repay the BBL before bankruptcy proceedings are instigated.

I should say I've not yet spoken with any sole traders being threatened with bankruptcy as yet, but time will tell.

 

[jimbof]

But they can - "Enforcement action includes petitioning the borrower for insolvency or starting administration proceedings. Enforcement is not expected unless in the event of serious or organised fraud, or borrower refusing to pay but has assets"

I suspect where a sole trader is unable to repay the loan and is also a property owner, then either the BBL lender or British Business Bank will look to threaten the borrower with bankruptcy, which will likely lead to the loss of their property. In these scenarios the sensible advice would either be to remortgage or sell their property to repay the BBL before bankruptcy proceedings are instigated.

I should say I've not yet spoken with any sole traders being threatened with bankruptcy as yet, but time will tell.

Hrm... The borrower's primary home and vehicle are not supposed to be at risk, so you'd expect a bank to disregard them in the question of whether they are refusing to pay but have assets.

By that reading it would seem reasonable to expect that refusing to pay but have a single home and car would mean no bankruptcy petition, but refusing to pay and having several properties and motor vehicles, or maybe significant non-cash assets like jewellery, could result in enforcement on that property?

 

[ChrisCallaghan]

@jimbof I think the guidance on this has been very misleading. The lender cannot take any direct action against the borrowers home, for example going after a charge against a sole trader's property.

HOWEVER it appears the lender can petition for a sole trader to made bankrupt, and in turn a trustee in bankruptcy would go after any properties (and other assets of value) in the bankrupt's name.

 

[jimbof]

@jimbof I think the guidance on this has been very misleading. The lender cannot take any direct action against the borrowers home, for example going after a charge against a sole trader's property.

HOWEVER it appears the borrower can petition for a sole trader to made bankrupt, and in turn a trustee in bankruptcy would go after any properties (and other assets of value) in the bankrupt's name.

I assume you meant lender can petition for bankruptcy.

Under what circumstances though? "Unwilling to pay but has assets" - if the primary home is not considered an asset they should be considering selling for the purpose here, then it seems it doesn't get as far as the petition. It stops at that point, unless there are other mitigating factors, surely?

Are you aware of anyone yet in the situation of being sole trader and only having a single home and being made bankrupt on the basis of a petition from the bank?

 

[ChrisCallaghan]

I assume you meant lender can petition for bankruptcy

Yes! Thank you and corrected.

Under what circumstances though? "Unwilling to pay but has assets" - if the primary home is not considered an asset they should be considering selling for the purpose here, then it seems it doesn't get as far as the petition. It stops at that point, unless there are other mitigating factors, surely?

I see where you are coming from. I took this to mean that though the lender cannot take direct action against a property, they would be allowed to go for bankruptcy, and then let a trustee in bankruptcy deal with the property. What ever rules or guidance has been put in place regarding BBLs, they do not undo a trustee in bankruptcy's power to realise assets. But I could be interoperating this completely wrong. It's about as clear as mud.

Are you aware of anyone yet in the situation of being sole trader and only having a single home and being made bankrupt on the basis of a petition from the bank?

No, not come across any such cases, but I do tend to come across more Ltd work than sole trader.

 

[ChrisCallaghan]

Are you aware of anyone yet in the situation of being sole trader and only having a single home and being made bankrupt on the basis of a petition from the bank?

@Lisa Thomas , @Gavin Bates & @Chris Parkman have any of you come across BBL lenders petitioning sole traders for bankruptcy?

 

[frank759]

And if they have no assets (property / car) then this is clean cut... The bank claims on the government guarantee and the worst that happens for the borrower is a negative mark on their credit file

 

[Lisa Thomas]

@Lisa Thomas , @Gavin Bates & @Chris Parkman have any of you come across BBL lenders petitioning sole traders for bankruptcy?

Not yet, Chris...

 

[UK Contractor Accountant]

9 years disqualification for this Director - over egging turnover on BBL and failure to maintaining adequate accounting records- how convenient!

"S S (“Mr S”) caused S Limited (“S”) to apply for a Bounce Back Loan (“BBL”) of £45,000 which he knew or ought to have known that S was not entitled to. In that: The BBL criteria allowed a business to borrow between £2,000 and up to a maximum of 25% of the company turnover Company Accounts for S made up to 30 June 2019 show a turnover of £21,450 The company turnover for 2019 declared by Mr S on the BBL application form was £190,000 and was therefore overstated

On 5 June 2020, £45,000 was credited to S ltd bank account in respect of the BBL. Between 01 July 2019 (the day after the last set of prepared accounts) and 01 June 2021 (the date of liquidation),

Mr S failed to ensure that S maintained and / or preserved adequate accounting records, or in the alternative failed to deliver up such records to the Liquidator. As a result, it has not been possible to: Ascertain if S’s expenditure of a £45,000 Bounce Back Loan was used to the benefit of the company and/or its creditors Establish if payments made to a third party between 11 June 2020 and 09 September 2020 totalling £28,700 were legitimate business expenditure."