The impact of BBLS and CBILS in Insolvency

The impact of BBLS and CBILS in Insolvency

 

In response to the COVID-19 pandemic, in late March and April 2020 the Government announced the introduction of the Bounce Back Loan Scheme (BBLS) and Coronavirus Business Interruption Loan Scheme (CBILS).

 

The purpose of the schemes was to provide timely financial support to businesses affected by the COVID-19 outbreak with government-backed lending; interest free for the first 12 months.

 

Since the schemes were introduced a total of 1,514,605 BBLS and CBILS applications have been approved, with in excess of £63.18 billion loaned (as at 13 December 2020).

 

When a company or individual who has received a BBLS or CBILS loan enters into insolvency proceedings these loans will be a creditor of their estate.

 

For loans under £250,000 no security or personal guarantee was required and therefore these will be strictly unsecured creditors, ranking behind preferential, HMRC (in respect of their secondary preferential) and secured creditors (subject to any prescribed part, in Corporate Insolvency).

 

For loans over £250,000 security or a personal guarantee might have been sought by the lender and therefore Directors may require independent advice on their own personal position. The lender’s position may also be improved in a corporate insolvency scenario should their loan be backed by security, particularly if there are fixed assets.

 

Insolvency Practitioners have also been tasked with scrutinising the use of the loans and whether they were properly applied for. The purpose of the loans was to support business expenditure and as such Directors may be held personally liable dependent on the outcome of the Insolvency Practitioner’s investigations.

 

If Directors/individuals or their advisors are looking to seek further advice in relation to this topic, or their financial position generally, please contact our office.

Finance Act 2020 & Personal Liability for Company Directors

With the reintroduction of HMRC’s preferential status the focus of the Finance Act 2020 has been firmly set on the debate as to the fairness of this change.

Somewhat overlooked therefore are other provisions of the Finance Act 2020 in relation to the recovery of Company tax liabilities from a Director personally; in the event of multiple consecutive insolvencies.

In perhaps a welcome attempt by the Government to challenge the use of phoenix companies, HMRC will have the ability to hold Directors (including Shadow Directors) jointly and severally liable for Company tax liabilities under certain circumstances.

The criteria which are required to be met are set out in Schedule 13 of the Finance Act 2020; summarised below:

  1. In a five 5 year period a Director has had, at least, two failed companies (i.e. companies subject to an insolvency procedure);
  2. In the same 5 year period the Director sets up a third company;
  3. The failed companies have all traded in the same, or similar activity; and
  4. The failed companies have a total tax liability of more than £10,000, the tax liability was more than 50% of the total unsecured creditors, or the failed companies had not submitted tax returns.

If these criteria are met, HMRC will have the powers to issue a Joint Liability Notice to hold the Director jointly and severally liable with the old and new companies for their combined tax liabilities.

There are similar provisions in the Finance Act 2020 with regard to companies which have entered into tax-avoidance arrangements and the Directors who have facilitated or benefitted from those arrangements. In such circumstances Directors can again be made personally liable for their companies’ tax liabilities.

HMRC (Secondary) Preferential Creditor

This week saw the reintroduction of HMRC as a (secondary) preferential creditor in new insolvency cases after its revocation 17 years ago.

We wait to see the impact this will have on the number of insolvency cases, the presence of HMRC as a petitioning creditor and how banks and other creditors will approach their relegation down the insolvency waterfall.

For anyone with concerns as to the impact of HMRC preferential status on either themselves or their clients please do not hesitate to get in contact with our office.

What are the responsibilities and duties of a company director?

When is a company director personally liable and what are a company director’s responsibilities during insolvency? Neil Dingley of Moore Recovery in Stoke on Trent explains the duties of a company director.

What is the role of a company director?

A limited company is made up of shareholders (members) and one or more directors:

  • The shareholders are the owners of the company. Typically, they will have invested money into the company in exchange for shares.
  • The company directors are responsible for the running of the company on a day to day basis. It is the directors’ responsibility to ensure that the business of the company is conducted in accordance with its own Articles of Association and the provisions of the Companies Act 2006, and that any profits the company makes are returned to the shareholders by way of dividends. Directors have a fiduciary duty to act in good faith and in the best interests of the company.

In small or family run companies it is often the case that the directors and the shareholders are the same people, metaphorically wearing different hats.

What are the statutory duties of a director under the Companies Act 2006?

A director’s statutory duties are set out in sections 170 to 181 of the Companies Act 2006. In broad terms they set out the ways a director owes a duty to the company. They can be summarised as follows:

1. To act within powers. The powers of a director are set out in the company’s constitution (broadly speaking its Articles of Association).

2. To promote the success of the company for the benefit of its members (shareholders) as a whole. In promoting the success of the company, a director must have specific regard to the following provisions:

  • the likely consequences of any decisions in the long run
  • the interests of the employees of the company
  • the need to foster the company’s business relationships with its stakeholders, such as customers and suppliers
  • the impact of the company’s business on the community and the environment
  • the desirability of the company maintaining a reputation for a high standard of business conduct
  • the need to act fairly between members of the company

3. To exercise independent judgement.

4. To exercise reasonable care, skill and diligence.

5. To avoid conflicts of interest.

6. Not to accept benefits from third parties.

7. To declare interests in transactions or arrangements with the company.

When is a company director personally liable?

Generally, a director may be personally liable when he or she:

  1. fails to meet his or her responsibilities under the Companies Act 2006
  2. falls foul of one or more of the provisions of the Insolvency Act 1986
  3. is found guilty of an offence under the Company Directors Disqualification Act 1986 and as a result is fined or has a compensation order awarded against him/her

Companies Act 2006

Liabilities under the Companies Act 2006 can arise mainly as a result of a breach of the statutory duties as set out in sections 170 to 181 of this Act.

Insolvency Act 1986

Liabilities arising under the Insolvency Act 1986 can derive from the following:

  • wrongful trading (section 214) – This arises when a director knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation or administration at some point before the start of the winding up of a company. The director may be liable to contribute to the company’s assets.
  • fraudulent trading (section 213) – This arises in the course of a winding up when it appears that any business of the company has been carried out with the intention of defrauding creditors. The court may direct that the director contributes to the company’s assets.
  • misfeasance (section 212) – This is something of a ‘catch all’ section which applies if, in the course of a winding up, a director has misapplied or retained property of the company or is guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company. In this case, the court may require the director to restore or account for any property or to contribute to the company’s assets.

It is worth noting that with the advent of the Corporate Governance and Insolvency Act 2020 (CIGA) the provisions relating to wrongful trading have been relaxed until 30 September 2020 due to the circumstances companies and their directors find themselves in as a result of the coronavirus (COVID-19) pandemic. However, the other provisions under the Insolvency Act remain, as do those under the Companies Act.

Company Directors Disqualification Act 1986

Liabilities under the Company Directors Disqualification Act 1986 arise as a result of investigations into a director’s conduct following a liquidation or administration. A director can be fined and/or disqualified as a result of breaches of the Companies Act and/or offences under the Insolvency Act.

In addition, further to the introduction of the Small Business, Enterprise and Employment Act 2015, a director may have a compensation order awarded against him or her. This is relatively new legislation and only one compensation order has been awarded against a disqualified director.

What are a company director’s responsibilities during insolvency?

While a director has a duty to the company, in times of financial distress, such as when a director knows or suspects the company to be insolvent, his or her duty is no longer to the company but to the creditors of the company, as it is potentially their interests which may be prejudiced as a result of any action or inaction on the part of a director.

When a company enters into formal insolvency proceeding such as liquidation or administration, a director will remain a director for statutory purposes, however his or her executive powers will end and he or she will have a responsibility to cooperate with the administrator or liquidator.

In summary, whilst a company continues to trade in the normal way, a director has a duty and responsibilities to ensure that it is run properly in accordance with its Articles and with the relevant legislation, with a view to maximising the return to the members. However, if a company is struggling financially and potentially insolvent a director’s duties turn to minimising the risk and exposure of the company’s creditors, and if he or she fails to do this, the consequence could be personal liability.

About the author

Neil Dingley is an Insolvency Practitioner and Partner of Moore Recovery in Stoke on Trent and has a background in information technology and accountancy.

See also

What you need to know about Corporate Insolvency and Governance Bill

What to do if you receive a winding up petition from HMRC

Insolvency notices

Find out more

Companies Act 2006 (Legislation)

Company Directors Disqualification act 1986 (Legislation)

Insolvency Act 1986 (Legislation)

Corporate Governance and Insolvency Act 2020 (Legislation)

Small Business, Enterprise and Employment Act 2015 (Legislation)

Publication date: 5 August 2020

Any opinion expressed in this article is that of the author and the author alone, and does not necessarily represent that of The Gazette.

Mindful Miles Challenge

The current situation unfortunately has put a hold on the fundraising events we planned for our Charity of the year – NORTH STAFFS MIND, a number of the staff at Moore Recovery Stoke will be taking part in their Mindful Miles Challenge. Over the coming days you will see individual challenges being posted here and on our LinkedIn page, please take a look, and donate to this brilliant charity.

Further response to Coronavirus disease

The world we inhabit today looks very different to the one we inhabited just ten days ago.

The restrictions placed on those businesses which remain open are as draconian as they are unprecedented.   Their imposition is one of absolute necessity in order to contain and limit the spread of Coronavirus enabling the Health Service to prepare for the predicted rise in virus related referrals in the coming days and weeks.  We must all stay in our homes unless absolutely necessary.

Put simply, the UK is in lockdown in all but name.

The very language we find ourselves using reflects the gravity of the situation.  In his broadcast to the nation the Prime Minister, leader of a War Cabinet, required every UK citizen to enlist in the fight against the virus, in a battle in which NHS staff and other care workers are in the front line.  If there had been any doubt before, now there is no doubt.  The country is at war against Coronavirus.

And yet life goes on.  Business continues.  With gatherings restricted to no more than two people, face to face meetings have all but become a thing of the past and seemingly overnight we have all become experts in Zoom, Teams and WhatsApp.

We live and do business in a connected world. Those connections may be virtual rather than physical but we still remain connected.

Every business is part of a supply chain.  Every business has its own customers. Every business has its own employees.  And every crisis has a beginning a middle and an end.

We are clearly in the early days of the current crisis.  But if we stay connected, communicate with our staff, our customers and our suppliers we can establish a new pattern of working; one which may look very different to what we have been used to, but one which will enable us all to weather the current storm and see the crisis through to the end.

The Government has put in place further measures to help businesses survive these difficult times.  In addition to those mentioned in our previous communication, the following steps have been taken:

  • The introduction of furloughed employees
  • Similar assistance for the self employed
  • A 3 month extension for the filing of accounts
  • Postponement of or online alternatives to AGMs

The relaxation of the wrongful trading offences under the Insolvency Act 1986 – although those relating to fraudulent trading will remain.

Furthermore, the Government has announced new provisions for businesses which are struggling because of the current crisis. These include:

  • a moratorium for companies giving them breathing space for from creditors enforcing their debts for a period of time whilst they seek a rescue or restructure
  • protection of their supplies to enable them to continue trading during the moratorium
  • a new restructuring plan, binding creditors to that plan

It is clear that through the introduction of these measures the Government is offering a support package designed to see businesses through the current economic crisis and into more stable and hopefully prosperous times ahead.

The links to the Government’s survival remedies are set out at the end of this email.

These are undoubtedly the most challenging times any of us has lived through.  If you wish to discuss what can be done to help you and your clients please do not hesitate to call us on any of the numbers below.

In the meantime stay safe and please accept our best wishes to you and your circle of colleagues friends and family.

https://www.gov.uk/government/news/regulations-temporarily-suspended-to-fast-track-supplies-of-ppe-to-nhs-staff-and-protect-companies-hit-by-covid-19

https://www.gov.uk/government/news/companies-to-receive-3-month-extension-period-to-file-accounts-during-covid-19

https://www.gov.uk/guidance/claim-for-wage-costs-through-the-coronavirus-job-retention-scheme

https://www.gov.uk/guidance/claim-a-grant-through-the-coronavirus-covid-19-self-employment-income-support-scheme