The Bounce Back Loan Scheme

Under the Bounce Back Loan Scheme (BBLS) launched on 4 May 2020, the UK government  (via the British Business Bank (BBB)) provided full guarantees for loans of up to £50,000 for companies impacted by the Covid-19 pandemic. The loans were administered by banks and other commercial lenders, granted with a low-interest rate of 2.5% over a period of 10 years with zero fees, and repayments were deferred for a year. The Scheme, which lent over £47 billion to more than 1.1 million companies, offered a fast-track lifeline to thousands of businesses within the UK.

In order to obtain a loan under the BBLS, a company would have to demonstrate that it (a) was based in the UK; (b) was established before 1 March 2020; (c) had been adversely impacted by the coronavirus; and (d) was not an undertaking in difficulty. The loan also had to be used to “provide an economic benefit to the business”, but no personal guarantees were required.

Abuse of the BBLS

Given the urgency with which the legislation was enacted, compounded by the loose nature of checks on borrowers (with lenders permitted to rely on self-certifications / declarations of eligibility in order to meet a delivery target of 24 hours), it was widely accepted prior to launch that the BBLS would be vulnerable to abuse. These expectations were proved correct; the National Audit Office has estimated that £4.9 billion, or 11% of the loans granted, was fraudulently claimed.

The ease with which the eligibility criteria were sidestepped and / or loopholes within the BBLS were exploited is now coming to light.

Some key categories of BBLS fraud include:

1. Individuals created new companies (or alternatively acquired existing shelf companies) as fake businesses in order to obtain a loan;
2. Loans were provided to companies already in financial distress or dormant prior to the pandemic;
3. Some directors misused the loans for personal benefit, for example, the purchase of luxury watches, buy-to-let properties and gambling; and
4. Directors dissolving their companies or resigning in an attempt to avoid repaying the loan and also any investigation into their conduct.

The Insolvency Service response

To the tangible frustration of various officials, efforts to recover these sums have been slow to progress.

However, the Insolvency Service (IS) is investigating and taking robust and public action against those directors they have concluded have fraudulently taken advantage of the BBLS, in the form of disqualifications and even criminal prosecutions. Furthermore, the end of the suspension of the Corporate Insolvency and Governance Act 2020 has re-instated the threat of directors facing personal liability for wrongful trading.

Historically the IS has been prevented from investigating directors of companies which have been dissolved without being subject to a formal insolvency process beforehand (unless the dissolved company had been restored to the register). This enabled many directors to dissolve their companies without repaying creditors.

Howewer, this loophole has been addressed by the Ratings (Coronavirus) and Directors Disqualifications (Dissolved Companies) Act 2021, which imposes personal liabilities on directors who dissolve companies where the qualifying conditions to do so have not been met (most importantly, the condition that a dissolved company is not indebted to creditors). The IS is now able to investigate those directors which may result in a disqualification order and / or compensation orders or undertakings.

Significantly, the legislation is retrospective, applying to dissolutions within the last 3 years. Therefore, directors of companies which were dissolved without repaying a BBLS loan can expect to be investigated.

Insurance implications

Ongoing investigations by authorities into the BBLS may have the following implications for the D&O / FI insurance space:

1. An uptick in claims for the indemnification of investigation costs arising from IS investigations and / or the Taxpayer Protection Taskforce (a department tasked to recover £1 billion made in fraudulent and erroneous payments made under the Government’s various pandemic support packages).

Some investigations are likely to be protracted and complex due to funds potentially having been laundered through multiple accounts and via domestic and foreign shell companies. Although insurers may ultimately recover such costs in the case of genuinely fraudulent companies, there are likely to be many businesses who took BBLS loans with legitimate intentions but now face investigation due to spiralling financial difficulties.

2. Further claims arising from alleged breaches of directors’ duties brought by third party creditors and shareholders.

Investigations by the IS may prompt creditors and other stakeholders to issue claims against the relevant directors who illegitimately sought BBLS loans and / or used such loans for inappropriate purposes.

Following the Finance Act 2020, details of claims made by employers under the furlough scheme are now published online, aiming to encourage whistleblowing.

3. Actions against lenders by their shareholders or other stakeholders for failing to carry out sufficient checks on borrowers or alternatively failing to take sufficient steps to recover lost funds, relying instead on the government guarantee.

In order to reclaim their loans under the BBLS government guarantees, lenders have to demonstrate that they conducted the mandatory (albeit limited) eligibility checks required as part of the scheme. This process has unveiled systemic deficiencies in lenders’ controls to prevent financial crime and money laundering and consequently the removal of government guarantees from BBLS loans to the tune of £240 million.

Some have consequently considered whether the BBB may be able to avoid liability under the guarantee(s) as a result of the lender’s breach of the Quincecare duty; namely, if it transpires that the BBLS loans were paid out in circumstances which would raise questions in the mind of a reasonable banker as to whether the payment was in fact truly authorised for the company’s benefit.

Government assistance for businesses in the early stages of the pandemic was unprecedented and fraught with significant credit and fraud risk. The recovery process is now underway and, irrespective of the scale of its success, will likely raise some complex coverage issues for the insurers of both the borrowers and their lenders.