Bounce Back Loans (“BBLs”) and Coronavirus Business Interruption Loans (“CBILs”)
What opportunities will they provide for insolvency litigation?
New lending under the above headings during the pandemic exceeded £80bn.
Author – Mark Sands
There has been much media speculation as to the extent to which BBLs were obtained fraudulently. Those who made fraudulent applications are now being held to account by the Insolvency Service, with a steady stream of disqualification orders stopping those responsible from acting as a director for several years. Many of these directors may also find themselves personally liable to the lender who, if the loan had been legitimately obtained, had agreed not to seek a personal guarantee from the director (very unusual in lending to SMEs) as the risk was being underwritten by the Government. However, how does that help the now insolvent company and, more importantly, its creditors?
Those directors who made fraudulent applications will clearly have been in breach of their duties as directors. If they have breached their duties in that respect, it is likely that many may have ignored their duties in other ways. Whilst SMEs are a key element of our economy, and the vast majority of directors do not abuse the protections which limited liability provides to them, my many years in the insolvency profession have shown me, time and again, that too many directors ignore their duties and pay scant or no regard to any concept of corporate governance. They can, and should, be held accountable by a liquidator for any losses the company, and its creditors, suffered as a result of their actions.
BBLs were for a maximum of £50k and so any claims arising from a single BBL may be difficult, but not impossible, to litigate in a cost-effective manner. CBILs were in the main much larger loans and so, if the funds from a CBIL were misused, then a commercially viable claim is more likely. However, if the director, as well as misusing the funds from the BBL or CBIL, also abused their wider position and caused the company other losses, then the claim can be increased and, in my experience, can often develop into a much larger claim. Another common area of abuse is the reuse of company names, where it is possible to see a director facing personal liability for certain debts due to the creditors of the failed company.
As well as breach of duty claims, liquidators can also look for other ways to recover funds for creditors, whether those funds flowed from BBLs and CBILs or from the other more usual activities of the company. Those rights of action include challenging transactions for less than full value (especially when entered into with related parties such as the director or their families and other companies under their control), payments to clear one debt ahead of other creditors, illegal dividends and seeking payment of overdrawn directors’ loan accounts. Liquidators are already busy scrutinising company records looking for evidence of wrongdoing – as corporate insolvencies increase their experience in this area will be deployed to maximum effect.
Many small corporates fail with minimal or no realisable assets. The cynic in me would suggest that certain directors welcome, or even plan, that outcome in the (mistaken) belief that the liquidator, with no funds to pursue them, will simply ignore or abandon these claims. In cases where litigation can be cost effectively pursued and it is clear that there are assets available to settle any award, the directors can run but they cannot hide – contentious insolvency practitioners, their solicitors, ATE providers and funders stand ready to work together to ensure that these claims are pursued for the benefit of insolvent estates and their creditors. When faced with this compelling team working together with a common aim, delinquent directors will be well advised to settle – engaging with the liquidators and, where appropriate, using mediation and other forms of alternative dispute resolution, is likely to be in their best interests.
I expect there to be busy times ahead for the insolvency profession and for the delinquent directors who need to be brought to book. There have been two years of below trend rates of insolvencies, a deep recession and an economy which was fed £80bn of new funds, some of which will have been misused. We will see more insolvencies with more reason to expect misconduct by directors. The combination of increased levels of insolvencies with material funds having very recently been loaned to many of them, which we know some directors have misdirected, means that contentious insolvency practitioners will have plenty of opportunities to go after directors and other parties to recover money for the insolvent company and its creditors.
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