Overview Of Defending A Dividend Paid From A Bounce Back Loan
There are circumstances in which defending a Divdend paid from a Bounce Back Loan may be possible. It is stressed it MAY be possible hence the question can you use a Bounce Back Loan to pay Dividends? It is conceivably not a welcome position to have to defend.
A great many of the notably well publicised cases of egregious Director conduct involving Bounce Back Loans, concern them taking the funds as soon as they arrive by moving them to a personal bank account. Attempts to justify such actions as being a lawful Dividend often will fail.
Such cases may result in Director disqualification and claims lodged by a Liquidator for repayment upon a company going into insolvent Liquidation.
However, there seem to be fewer cases of those publicly reported that show the Insolvency Service having (to date) addressed the sort of issues raised below.
Bounce Back Loan Funds Becomes Company Money
The starting point is the use of Bounce Back Loan support was only to be used for the economic benefit of a company. It is difficult for a Director to suggest payment of a Dividend would be for the economic benefit of the company and not themselves, even if this was deemed to be part of their remuneration.
A dividend takes money out of a company; the opposite of what a Bounce Back Loan was intended to do.
Bounce Back Loan Conditions
As a result, the Bounce Back Loan scheme laid down rules about the use of the loan monies. However, once the funds have been paid into the company’s bank account it becomes company money. In exchange, the company has to repay the loan together with interest.
If the conditions set out in legislation for a lawful Dividend are met then the Directors may be capable of defending a dividend paid from a Bounce Back Loan. However, given Bounce Back Loans were supplied to typically struggling businesses hit by the effects of the Pandemic it might have been unusual for such conditions for a lawful Dividend to readily exist. There do not appear to be specific conditions set out which specifically disabled companies from paying Dividends for say a certain period of time upon receipt of a Bounce Back Loan.
Whilst the Bounce Back Loan Scheme required the funds to be used for the economic benefit of the company, that is a rather vague notion. How is it regulated? Certainly, the problem is once the loan is handed over to the company there is no detailed specific purpose for which the money was to be used, such as in the case of a Quistclose Trust.
What Is A Quistclose Trust?
A Quistclose Trust arises when money is provided by a lender to a debtor for a specific purpose. In the event the funds are used for other purposes then they can be traced to be returned to the creditor. And funds remaining with the debtor are held on trust for the creditor.
Mixing Of Monies
When Bounce Back Loan funds are paid over to a company’s bank account it would not be at all unusual for monies in the company’s bank account to become mixed up with the Bounce Back Loan monies. As a result, it is not likely to be straightforward for someone to identify whether the payment of a Dividend was made from company monies already in the bank account or the Bounce Back Loan.
In the case of mixed monies, it is likely to be both the original company money and the loan monies. The problem will be how would such a matter be unscrambled.
Furthermore, the matter of mixed monies could become even more complicated as a result of the company’s trading activities leading to further inflows and outflows of money.
Dividend Rules
The question of defending a Dividend paid from a Bounce Back Loan in all likelihood should be unaffected by the special nature of this form of Covid finance and the circumstance surrounding its provision.
In order to declare a Dividend Part 23 of the Companies Act 2006 has strict requirements that need to be fulfilled. It is that which is central to consideration of defending a Dividend paid from a Bounce Back Loan ie. the question of whether or not those rules have been followed.
Even if those rules have been followed that is not the end of the matter. Director’s duties require a Director to consider their Creditor Duty when making payments if a company’s solvency is in question. If a company is on the verge of insolvency then taking into account the Extent of the Creditor Duty may impact a Director’s ability to defend their payment of a Dividend out of monies that might potentially be capable of being traced into a Bounce Back Loan.
It might not be at all difficult to see circumstances in which the use of a Bounce Back Loan to pay Dividends would be very hard to justify, if not inconceivable. At the same time defending a Dividend paid from a Bounce Back Loan MAY not be a wholly insurmountable challenge if it was properly and lawfully declared. As ever those ‘facts’ of the case are going to be all important.
Such is the nature of the mandatory requirements for the declaration of Dividends that if indeed they have been fully followed a Director may be able to rely upon the same for their defence.
The longer the period between receipt of the Bounce Back Loan and any subsequent Dividend payment, the more difficult it COULD be for it to be challenged. This is probably the case even if the company later were to go into Liquidation.
Provided the company was solvent when the Dividend was declared (and remained solvent after the Dividend payment was made) and there were sufficient distributable reserves it might potentially be tricky to challenge.
Directors may be very likely to face serious problems attempting to justify Dividends taken very close to when the Bounce Back Loan was provided.
If you have any concerns about a dividend paid from a Bounce Back Loan contact us to discuss.
