We have previously examined how the Government’s Coronavirus Business Interruption Loan Schemes (the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Coronavirus Large Business Interruption Loan Scheme (CLBILS)(together the “Schemes”) work here and here.
The Schemes were set up by the Government to support eligible UK businesses which have been adversely affected by lost revenue and reduced cash flow due to the on-going pandemic.
Pursuant to the Schemes, the Government will provide a guarantee to the relevant lender for the borrower’s loan repayments (up to 80% in relation to CBILS and 100% for BBLS), to encourage lenders to continue to lend and provide access to fast finance. The Government will cover interest payments for the first 12 months and, under the CBILS, the Government will also cover any fees levied by the lender. In terms of security, under the BBLS and for CBILS facilities of less than £250,000, lenders are not permitted to take personal guarantees. If a personal guarantee is provided in connection with a CBILS loan, any recovery under the same will exclude the guarantor’s main home and such recoveries will be capped at 20% of the outstanding balance. The lender may still require other forms of security to be put in place under the Schemes and a borrower cannot benefit from both Schemes concurrently.
To that end, the British Business Bank (“BBB”),a Government owned business development bank, has been put in charge of administering the Schemes and reporting to the Government (the Public Accounts Committee) on the Schemes’ operation.
A report issued by the Public Accounts Committee on 10 December 2020 highlights the darker side of the Schemes and what it is costing the UK taxpayer. The report states that by the end of November 2020, 1.4 million CBILS loans had been paid out at a combined value of £42.2 billion alone. Moreover, BBB figures published on their website as at 17 December 2020 state that a total of over £68 billion of finance had been paid out across all three Schemes, with BBLS representing £43.5 billion of that sum and CBILS representing £19.6 billion.
However, as a result of a focus on speed of delivery, the report goes on to say that UK taxpayers may have been exposed to potentially huge losses in the region of £15 billion to £26 billion. Due to a lack of data those figures could be even higher! These are eye watering figures. To put that into context, the entire GDP of Cyprus in 2019 was £26 billion. The report states that the majority of these losses will be a result of credit losses (borrower default leading to insolvency) but the rest as a result of fraud. One of the features of BBLS is that the Government expects lenders to pay out vital funds within 24-48 hours of applying. This was, in part, to counter against the criticisms of the CBILS scheme that had seen large delays in pay outs. The corollary of speedy pay-outs is that banks have not, and were not expected to, carry out enhanced due diligence on those applications. There have been limited application checks, credit checks or affordability checks. Applicants needed only to self-certify that the information they were providing on their application was true and that they met the criteria. This makes it highly susceptible to fraudsters and high risk applicants (i.e. those likely to default on repayments). This might include making dishonest and false representations on the loan application form e.g. representing the applicant is a legitimate business when it is not or, simply, exaggerating turnover figures to qualify for a higher loan. It could also include deliberately and dishonestly withholding relevant information or dishonestly applying when the applicant knew it did not qualify (i.e. a UK business that has been negatively impacted by Covid-19 and was not in difficulty on 31 December 2019).
Although banks have been required to carry out their usual anti-money laundering checks which, it is stated, has led to approximately 27,000 fraudulent loan applications being blocked (at a value of over £1.1 billion) the scale of fraud in approved loans is unknown. The British Business Bank is working with lenders to carry out a sampling exercise and is expected to report back to the committee at the end of January 2021 with its findings so the committee can assess whether its estimate of £15-26 billion is accurate.
BORROWER DEFAULT AND RECOVERY PROCESS
In the event a borrower defaults under a BBLS loan, the lender is able to claim up to 100% of all amounts due under the facility (less any recoveries) from the Government if it confirms that it believes “no further payment is likely”. The guidance provides that lenders must undertake an “appropriate recovery process” in accordance with their existing processes but can make a claim on the guarantee from the Government prior to completing such a recovery process (the claim under the guarantee must simply be made “within a reasonable time period”). The lender will be under an obligation to repay the Government if it subsequently makes any recoveries but there is a concern that this process provides very little incentive from the lender’s perspective in terms of continuing to pursue the borrower or other security provider for the sums owed, if they are simply able to make a claim under the Government guarantee. If the lender is disinclined to continue its recovery process, this will have the effect of causing many more BBLS loans to be claimed from the Government and ultimately funded in full by the taxpayer. It should be noted that whilst this reflects what has been agreed with lenders in principle, HM Treasury are expected to publish settled operational details of the agreed recovery process shortly.
The guidance regarding recoveries under CBILS loans is similar; the lender is under an obligation to undertake its usual recovery process in a default situation which is consistent with its standard approach in relation to non-CBILS debt. This may include engaging a debt recovery agent and enforcing its security (a lender may be more inclined to take a full security package in connection with the CBILS loans rather than BBLS loans as the value is likely to be higher and the Government guarantee is limited to 80%). The lender can deduct reasonable costs incurred in connection with the enforcement from the recovery proceeds. As in relation to the BBLS loans, the lender can make a claim on its Government guarantee within a “reasonable time period” following service of a formal demand (up to 18 months after service of such formal demand) but recovery action should continue post-claim if incomplete at the time the claim is made. If subsequent recoveries are made, then 80% of those recoveries which relate to CBILS debt, should be returned to the BBB.
In terms of the proceeds of any enforcement, these should be apportioned between CBILS and non-CBILS debt in accordance with the BBB guidance. This states that recoveries from any CBILS specific security (i.e. any security which expressly relates only to the CBILS facility) should be applied solely in satisfaction of the CBILS debt. If the lender has taken security which is intended to support specific CBILS and non-CBILS debt, this should be applied (i) firstly in satisfaction of any prior and/or simultaneous non-CBILS debt and (ii) secondly, pro-rated between any CBILS debt and subsequent non-CBILS debt. Finally, any other net proceeds (including the proceeds of an ‘all monies’ charge) should similarly be applied (i) firstly in satisfaction of any prior and/or simultaneous non-CBILS debt and (ii) secondly, pro-rated between any CBILS debt and subsequent non-CBILS debt. Note that the apportionment of recoveries made pursuant to the enforcement of personal guarantee will differ, given the position set out above regarding the use of personal guarantees by way of security for a CBILS loan.
STEMMING THE TIDE
Ultimately, our prediction is that the Government will be left to pick up the tab for a large number of loans advanced under the Schemes (by a call on the guarantees by lenders) and then it is a question of whether the Government can (or, politically, if they will) pursue the same businesses the Schemes are designed to save for taxpayer’s losses. In cases of fraud, public policy should dictate that these losses are pursued more vigorously than, say, losses resulting from borrower default. This will inevitably lead to many more winding up petitions with the Government as one of the largest creditors. Office Holders will then have all their usual powers of investigation and recovery including the ability to pursue individual directors directly if fraud can be established.
As for what is believed to be the majority of anticipated losses (borrower defaults), once the interest free holiday ends in 12 months’ time, businesses will be expected to start making monthly repayments. Capital repayments will also become due according to the terms of the loan agreements. Many of those businesses are, sadly, expected to default and inevitability we may see a flood of insolvencies as a result of lenders enforcing their security through the appointment of receivers or administrators. It is anticipated a growing number of insolvent estates will have a significant asset shortfall making the prospect of dividend payments to unsecured creditors even more remote.