Bounce back loans and the rights of lenders
Bounce Back Loans (BBLs) were made available through a number of accredited lenders. The arrangements provided that the first year of borrowing was to be interest free, with the remainder of the term being fixed at 2.5%.
Businesses could claim up to 25% of their turnover, up to a maximum of £50,000.00, as a loan. The borrower would contract with the lender to repay the sum loaned; however, whilst the borrower always remained principally liable to the lender, the Bounce Back Loan Scheme (BBLS) provided a full government-backed (British Business Bank PLC) guarantee against the outstanding balance of the loan, including any repayable interest, in the event of a default. Approximately £46.6 billion was advanced to borrowers under the BBLS.
Now, several years on, we have seen high rates of default of BBLs. The government's latest report on the BBLS performance estimates £1.1 billion as suspected fraudulent draw downs, £3.2 billion of loans in arrears, a separate £1.4 billion of defaulted loans, and £1.2 billion paid to lenders under the BBLS guarantee agreement (to date). Practitioners will also be aware of high rates of director disqualifications for misuse of the BBLS, relating to both applications for sums greater than a borrower's entitlement, and for misuse of the funds once received. The same report refers to 242 director disqualifications, 101 bankruptcy restrictions and 1 criminal prosecution to date.
The high volume of insolvencies where there is a BBL liability raised questions on all monies security by lenders as well as the prospect of a lender utilising bank account set off. A lender does have the ability to utilise bank account set off rights where applicable. Practitioners will be aware of some early uncertainty around whether it was appropriate to remove funds from an account where such set off rights may exist but which have not yet been exercised, in order to apply the funds generally in an insolvency process. Given the BBLS closed to new applicants on 31 March 2021, the prospects of a borrower having retained BBL proceeds and still holding these pre-insolvency is now unlikely, but the joint statement from the ICAEW, IPA, ICAS and CAI confirms that IPs should use their judgement in line with the Insolvency Code of Ethics and record decisions made.
Of longer term applicability to IPs will be the question of any lender security. There is general consensus that, while the BBLS was intended to provide unsecured loans to borrowers, where a lender had existing security which secured the payment of 'all monies', and the lender subsequently advanced a BBL, there was potential for the lender to apply the proceeds of secured realisations to the BBL liability. The position will need to be considered on an individual basis.
With the significant arrears reported by government, we expect that liabilities from the BBLS, and issues arising from such liabilities, will continue to be a feature of many insolvencies for some time.