This article should be read if you have taken out a Government Guaranteed loan or received furlough payments.

Our advice is “Be Prepared”

Back in April 2020 everything started to change. The government threw huge sums of money at the pandemic and we all became acquainted with words like furlough and bounce back and acronyms CJRS, CBILS, BBLs. Wrongful trading also got forgotten as the banks were chastised for not getting the cash out the door quick enough. Winding up petitions were suspended where there was even a whiff of ‘Covid-19 your Honour’. Many thought all this would be a temporary measure and the good times, after the summer, were sure to return.

We are now approaching budget time and the Treasury must be thinking about how to get some of their money back. Strangely enough, we are starting to see certain trends suggesting some directors may be facing risks.

New Cash – Bounce Back and CBIL’s

Directors have to follow the rules set out in the Companies Act. The idea is that they promote the success of the company and avoid doing silly things when the storm clouds start appearing. Easier said than done; and human nature sometimes clouds directors’ judgement.

Whilst government-backed loans have been a lifeline for many, there were a few strings attached. These may not have been fully considered in the rush to keep the business going.

Here are a few questions to which you should have answers

The application form requested details of the purpose of the loan. It explained that the sole purpose was to provide economic benefit to the business i.e. to provide working capital or for investment in the business.

When making the application directors had to certify that the business had been ”adversely impacted by Covid-19” and was not “in difficulty”. Notes at the time supporting these concepts should have been made.

Directors had to make a turnover declaration in support of a loan. Again prudent directors would have kept evidence of the basis of any forecasts at the time.

The loan agreement with the bank would have explained that the loan could not be drawn down if an actual or potential default event existed. Where a director should have known that the business was unlikely to survive, the funds should not have been drawn.

Care is needed about the use of the new loan. Many suggested that a key feature was that no personal guarantee was required, which must have sounded too good to be true at the time. Remember that the government was very clear about the purpose of this support – it was to provide working capital to allow the business to survive. It wasn’t about simply refinancing existing debt or making purchases outside the normal course of business. If the business fails, issues of preference may arise especially if there were other substantial liabilities that were not repaid.

If you have paid off an existing loan, as a number of lenders have suggested, this couid be seen as preference.

Paying the wages

The government thankfully introduced help for wages, thereby avoiding mass redundancies. HMRC are now taking an active interest to make sure the CJRS money was used properly. Hopefully prudent directors will have no difficulty in responding to such questions as:

Did you read the guidance before making a claim?

How was the business affected by the Coronavirus?

When did the business start and register for PAYE?

How many employees are there, and how many are still working?

Did the employer discuss the furlough scheme with all employees and issues letters to them?

How was the grant paid, and how was it paid to the employees?

Were PAYE/NIC and pension contributions paid?

Were furloughed employees contacted while on furlough, and how / how often?

Where are the bank statements?

Again “Be Prepared” –  Prepare answers to these questions

The Treasury want their money back

The Office of Budget Responsibility forecast £29bn from bad debt related to government schemes whilst the National Audit Office forecast Bounce Back Loan defaults of between £15bn and £26bn. The Treasury have confirmed to lenders that it was their responsibility, not the governments, to recover debts under Covid-19 loan schemes. Some of the larger law firms with banking departments are already reporting that the government are now refusing to pay sponsoring banks under government guarantees, in cases where adequate due diligence was not undertaken when the loans were made.

We have seen banks getting in trouble before and one possible exit route will be that the banks start to sell their loan books to venture/vulture funds. These sorts of buyers will have no hesitation in taking active steps to recover their debts.

In desperate times desperate measures and needed. Over the last year we have seen unprecedented levels of government support to the SME sector. This has been reflected in a near all-time low in corporate insolvencies to a level never seen since 1986. Recovery is on the way, but this time around corporates will be saddled with debt and growth needs working capital.

The good news is that there are now many restructuring tools available, including a couple of new ones like the Moratorium and the Restructuring Plan. Carter Clark were the first firm in the UK to use the Moratorium procedure, and we are currently working on a Restructuring Plan for a small business which, subject to Court approval, will be one of the first examples of a small business rescue using this new restructuring tool. Help is just a telephone call away.

We will be producing Articles on the Moratorium and Restructuring procedures in the coming weeks. These procedures are “Light Touch”. The Directors maintain control of the business and the procedures are designed to follow the benefits of Chapter 11 in the US. This protects the business and its creditors from vexatious individuals who could otherwise take precipitous action against you. It buys you time to act.

If any of the above strikes a chord and you need some help with the issues raised, then please give us a call.

Prevention is better than a cure – Be Prepared – Call Carter Clark