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Bounce back loan use has been a hot topic in recent times and one director disqualified for use of a bounce back loan and CBILS loan for 7 years can now consider the court’s position. They were unable to satisfy the court that such loans had been used for the company’s economic benefit.

Commonly bounce back loan investigations by the Insolvency Service have focused on two key issues:

  1. Exaggerated turnover when applying for the bounce back loan.
  2. Improper use of the loan for purposes unrelated to the business.
Director Disqualified For Use Of Bounce Back Loan For 7 Years

Bounce Back Loan Based Disqualification Proceedings

The case of Secretary of State for Business and Trade v Anderson [2024] EWHC 1090 (Ch) (“Anderson”) was director disqualification proceedings from a court order and not a director disqualification undertaking.

A majority of director disqualifications sprout from undertakings by agreement and settlement between the Insolvency Service and the directors, not due to a court order.

In the Anderson case, the company at the heart of the matter applied for a CBIL loan and a Bounce Back Loan

The CBILS loan of £60,729.85 was received to be used for the company’s working capital and bounce back loan of £50,000 was received. Bounce back loans could only be used for the economic benefit of the business that applied for it.

Bounce Back Loan Payments

The issue was that the company made payments of £137,810 between June 2020 and September 2020 to a connected company. The Secretary of State said this was a position which acted to the detriment of creditors as the company was insolvent and the payments were not for the benefit of the company which had applied for the covid finance loans.

An issue for the director in Anderson it seems was the matter of keeping company records to evidence the purpose of the transfers from the company to the connected company. Payments of company money also need to satisfy the proper purpose test.

Court Judgment

Judgment Highlights

To pick out some of the highlights from the judgment, the court had this to say:

In connection with that document, Ms Anderson produced no supporting invoices, no documentary proof of payments made by PEL, and no other contextual documents or correspondence of any variety, whether with the alleged payees or otherwise. She said that she (and presumably PEL and her husband) had been told by Morgan Phelps that there was “no requirement” to provide anything more, despite requests made subsequently in correspondence by the Insolvency Service, in letters dated 22 July 2021, 10 September 2021 and 8 November 2021, in which they said that they were not able to accept the explanation given, and amongst other things asked for copies of PEL’s bank statements, details of the alleged “payroll” payments, and details of the alleged relationship with “T Roberts” (who had not appeared as a creditor in the list of creditors in the administration).

The only response to those requests was Morgan Phelp’s somewhat intemperate letter of 3 August 2021, in which they said that their clients considered that they had provided everything available to them, and accused the Insolvency Service of having pre-judged the case and having acted covertly for the benefit of the administrators. Their response concluded, “our clients are exhausted with the entire affair and, what they consider to be, the unjust, partisan and orchestrated witch hunt against them”, and said that it might need to be left to the court to resolve the matter.

I have concluded, on the evidence, that:

80.1. the Payments made by the Company to PEL (of which Ms Anderson was a director and shareholder) in the period from 8 June to 12 September 2020 were made gratuitously, not in repayment of a debt or debts owed to PEL by the Company, and in any event, not for the purposes of the Company’s business, or in any fashion to its advantage; there was nothing in the circumstances of the Pandemic to justify them;

80.2. when the Payments were made, the Company was insolvent, as Ms Anderson must have known, and indeed, as in fact she knew; in substance, it had ceased to trade, and Mr Anderson was seriously unwell; most if not all of its other employees had departed; creditors were taking or threatening to take formal action; it was at serious risk of insolvency, and of formal insolvency proceedings – whether voluntary or otherwise; the Payments depleted the assets of the Company available for its unsecured creditors;

80.3. there was no prospect of a solvent or substantially solvent sale, but in any event, even if there had been, the Payments were or would not have been advantageous to its negotiation.

It follows that the Payments were to the detriment of the Company and its creditors, and I would have reached the same conclusion even if the Payments had been made in repayment of debts owed to PEL (there being no obvious or established reason to favour repayment of PEL in preference to other creditors, of which there were many). Ms Anderson accepted responsibility for having caused the Company to make the Payments – she was, at the time, the Company’s sole or certainly principal controller. In this regard, Ms Anderson’s conduct amounted to misconduct: notwithstanding the difficulty of the circumstances in which she found herself, it fell below the standards of probity and competence appropriate for persons fit to be directors, and it justifies a finding of unfitness.

Similarly, it follows inevitably from my findings that that sums borrowed under the BBL Agreement and the CBIL Agreement were used in breach of those agreements, because they were used neither as “working capital” nor for “the purpose of providing economic benefit to [the] business including, but not limited to, working capital or investing in [the] business”, but were instead used to make the Payments either gratuitously or for reasons not adequately explained, and in any event, for no economic benefit and not for the purposes of the Company’s business.

Again, I accept that in this regard, Ms Anderson’s conduct amounted to misconduct: it fell below the standards of probity and competence appropriate for persons fit to be directors, and it justifies a finding of unfitness.

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Author: Elliot Green
Last Updated: June 12, 2024

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Disclaimer: Director Disqualified For Use Of Bounce Back Loan And CBILS Loan For 7 Years

This page is not legal advice and is not to be relied upon as such. This article Director Disqualified For Use Of Bounce Back Loan And CBILS Loan For 7 Years is provided for information purposes only. You should take independent advice on the facts of your case. No liability is accepted for reliance upon this post.

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