With the first recipients now due to start repaying their Bounce Back Loans, it is clear that a significant proportion of firms will be unable to meet these repayments. What if your company used a loan to make dividend payments?
One of the many government relief measures introduced to help businesses cope with COVID-19 was the Bounce Back Loan Scheme (BBLS), which closed to new applicants at the end of March 2021.
Working via a network of private lenders, the BBLS lent between £2,000 and £50,000 in government-backed loans to eligible businesses that had been affected in some way by the pandemic. You can read key FAQs here.
So, what happens if your company is unable to repay? And what happens if you used all, or part of a loan to pay dividends to shareholders?
We asked Gareth Wilcox, partner at Opus Restructuring & Insolvency, some of the most commonly asked questions by contractors who have taken out loans via the BBLS.
When are BBLs due to be repaid, and can they be extended in any way?
Initially, BBLs were due to be for a term of 6 years. During the first of these years, no interest was to accrue and no payments would be due, and the balance would be recovered in the subsequent five years.
Later in 2020, however, the government announced as part of its Winter Recovery Plan that the following options would be available to BBL recipients:
- extending the term of the loan to 10 years;
- moving to interest-only repayments for a period of 6 months (you can use this option up to 3 times);
- pausing your repayments for a period of 6 months, if you have already made at least 6 repayments (you can use this option once).
Lenders are expected to advise borrowers of the above options around the time the first BBL payment is due to be made.
Who owns the debt? The Government or private lenders?
The monies due under the BBL are owed to the lender/bank by the recipient company. This means that it is the responsibility of the bank to collect the loan, and they will have an obligation to make attempts to do so before they will be able to apply to the government for payment under the guarantee.
Does my company have to repay the loan?
The short answer to this is yes. The government guarantee only kicks in when the borrower has defaulted on the loan and the BBL is a commercial loan treated the same as any other debt.
What happens if my company is unable to repay the debt? Am I personally liable?
The short answer to this is no. BBLs were provided to limited companies without personal guarantees so liability is limited to the company.
This is not quite the whole picture though. If a company is placed into an insolvency process as a result of its inability to pay a BBL (or other debt) the appointed liquidator/administrator will has a duty to investigate the circumstances leading up to insolvency. In particular, officeholders are bound to review company records for evidence of:
- Unfair Preferences (where the director of an insolvent company treats one creditor – including themselves – better than others);
- Transactions at Undervalue (where company assets are transferred for no, or minimal consideration);
- Wrongful trading (where a company has continued trading and incurred additional losses when the director ought to have known liquidation was inevitable);
- Misfeasance (a breach of a director’s duty to the company).
Any of the above can lead to a director being forced to make a personal payment into the insolvent estate, although this would not be connected to the BBL liability itself. Liability for Wrongful Trading had been suspended during the pandemic, however, the provisions came back into effect from 1 July 2021, so directors can once more be held liable for such losses.
Does it matter if I used some of the BBL to pay dividends?
This depends on the financial circumstances of the company. Dividends can only be declared from ‘distributable profits’. Broadly speaking, this means that a company’s most recent accounts must demonstrate that it is solvent before dividends can be declared. It is immaterial whether the BBL funds formed the cash used to pay a dividend, the key is whether the financial records show sufficient profits or not.
To the extent that any payments termed as ‘dividends’ are made where there were insufficient reserves, they would be deemed ‘unlawful’ and the recipient would be duty-bound to repay the unlawful element as a debt owing to the company.
Further detail on this topic can be found in a previous article I published here: When is an Insolvent Company not an Insolvent Company? | Opus Business Advisory Group (opusllp.com). This is, unfortunately, a common occurrence in owner-managed businesses where monthly payments are made to shareholders (initially as a loan) and subsequently cleared by declaring a dividend. If there are not enough reserves, the loan stays in place as due back to the company.
Surely the powers that be ought to be lenient for dividend breaches?
Unfortunately, there is no real scope for discretion in this matter. The Companies Act is very clear in that there were either distributable reserves to declare a dividend, or there were not. It is also clear that where reserves were not there, a debt is due back to the company.
The debt due to the company is repayable and capable of recovery by either the company or an appointed liquidator/administrator like any other. This means that actual commercial recoverability may be a factor (i.e. if the shareholder cannot afford to repay) but there is no ability for this to be overlooked.
What should I do now if I’m worried about insolvency due to dividend misuse?
Take professional advice, either by speaking to an Insolvency Practitioner or your accountant. It will be important to calculate the value of any overdrawn dividends so that the amount repayable can be taken into account when considering the options available to a company in distress.