In May 2020, the bounce-back loan initiative was introduced by the UK government which provided loans of between £2,000 and £50,000. The application limit was a maximum of 25% of annual sales, subject to a ceiling of £200,000. Each loan was given a six-year repayment programme, with interest charged at a flat rate of 2.5%.

The intention was to support all sorts of business activities while traders sought to deal with the financial impact of Covid-19 in order to survive the challenging experience and preserve the country’s economic base.

It is estimated that almost £47 billion was advanced by way of bounce-back loans, with a British Business Bank survey in 2022 estimating that around £3.5bn had been obtained under fraudulent circumstances, i.e., will never be recovered.

One of the facets of the bounce-back loan application process was the ease of obtaining the cash. The process only took minutes because of the few questions that had to be answered and crucially, there was no requirement for third-party verification of information provided.

Contrast this with the time, resource and information necessary to obtain a standard loan or overdraft. The sense of urgency meant that cash was in plentiful supply. Also, the fact that a personal guarantee was not required for the borrowing (similar to the Coronavirus Business Interruption Loan Scheme where a personal guarantee was not allowed for any loan up to £250,000 where the steps required to obtain such a loan were far more standard in nature) meant that banks turned to the government for reimbursement when repayments were not forthcoming.

What we have seen in the marketplace are banks taking all reasonable steps to recover the bounce-back loan monies, which is seen as good business practice because it allows the bank to satisfy the government that they have tried to recover the cash before seeking recompense from the government. That said, there is also evidence of banks seeking to add the bounce-back exposure to other secured debts e.g. mortgage or overdraft, which is contrary to the rules of the scheme. Borrowers are advised to take care and/or seek advice when dealing with banks in this regard.

There are plenty of examples of business entities that have not survived Covid-19, for whatever good reason, and have been forced to cease trading. Normally, the directors would take steps to have the company struck-off the register of companies but, where a bounce-back loan exists, banks are lodging an objection to the process. One impact of this is that there are now quite a few zombie companies that will never trade again, are not in a position to repay the bounce-back loan, but cannot be struck off.

If the directors place the company into insolvent liquidation, the liquidator has a duty to review all significant transactions which, as you might imagine, will include the bounce-back loan application and the use of the monies when received. Where abuse of the system is noted, The Insolvency Service (sometimes referred to as the Director Disqualification Unit) can take action against the director(s) deemed responsible. For example, in the year ended 31 March 2023, legal action by The Insolvency Service saw 458 directors disqualified for abuse of pandemic financial support schemes, with an average disqualification period of seven years, four months.

Many directors see this development as somewhat unfair because they genuinely tried to save the company but could not do so, and now find that they might be pursued through court.

Of course, if a director has acted in a responsible manner with the bounce-back loan monies, as has been shown in many of the liquidations that Meston Reid & Co are handling, there is nothing to fear.

It is only when somebody has abused the system that the long arm of the law is waiting. For example, one director who obtained a £50,000 bounce-back loan for his company and then applied to dissolve his company two weeks thereafter was sentenced to 20 months in prison. Another director applied for a bounce-back loan despite the fact that his company had ceased trading in October 2019 and he had used about £40,000 of the cash for personal use.

The Meston Reid & Co bespoke website, www.scotdebt.net, shows plenty more examples in the business section under “Updates and Articles” which reflect how serious the government are towards those who abused public money.

If the company has a bounce-back loan which will never be repaid, a formal insolvent liquidation process might be the answer. However, in Scotland, one cannot liquidate a company unless a liquidator is prepared to accept office. Clearly if there are no assets to pay for the costs of liquidation, why would a licensed insolvency practitioner accept the appointment? In such a case, one reverts to the zombie company problem.

Currently, it is unclear how many small companies will ever be struck off: perhaps a government tweak to the rules is required. Careful thought is required by all parties in this evolving issue.