Around 1.5 million businesses took out a Bounce Back Loan (BBL) during the pandemic, borrowing more than £47 billion total. The terms for these loans were designed to be supportive towards small business owners: no lender was allowed ask for a personal guarantee from them as part of the contract agreement.

Even sole traders or small partnerships, whose personal assets are usually at risk without the limited liability protection of a company, BBL terms mean that no recovery action can be taken over a principal private residence or a primary personal vehicle.

When the Government guaranteed the BBL scheme, it ensured that if a company taking out a loan went into liquidation, then the lender would be repaid in full by the Government.

Bounce Back Loan Fraud

After BBL were released the British Business Bank guidance stated, “……the loan will only be used to provide economic benefit to the business…”. An example given is the provision of working capital and goes on to explain that a BBL was not for personal purposes.

Martin Lewis, founder of MoneySavingExpert, asked the Treasury to explain more fully the meaning of this guidance. He then confirmed that the Treasury had written back to him, stating that it was acceptable and reasonable for a BBL loan to support a ‘normal’ level of income as a director of a company.

We refer to the MoneySavingExpert information as useful background rather than as definitive guidance.

The trade association for the UK restructuring and insolvency community, R3 (the Restoration and Reconstruction of Financial Assets), then published a set of ‘frequently asked questions’ surrounding BBL.

While these cannot be relied on as formal guidance, answers include if “…they used the BBLS loan monies to draw funds for reasonable living expenses at a rate similar or lower to that of pre-pandemic then it would be difficult to justify taking action against the director…”.

You would most likely have read about company directors buying luxury cars with their Bounce Back Loans. Fortunately, the vast majority of Bounce Back Loan recipients used the funds responsibly. Realistically, there are multiple factors that must be used to determine if a Bounce Back Loan has been obtained or used dishonestly.

What happens if a client goes into liquidation with a Bounce Back Loan?

If a BBL was not obtained and used legitimately, and the company subsequently enters into formal insolvency proceedings because it cannot afford to repay its debt, then there is potential for directors of that company being held personally liable for repayment.

When a company enters an insolvency process, the liquidator must determine whether one or more of its directors are responsible for the failure.

The pandemic and subsequent economic downturn has led us, as licensed insolvency practitioners, into a new situation. We've always supported business owners who are forced to close their company through no fault of their own. But now we're facing multiple businesses with the same issue at once, which is unprecedented.

We've needed to apply insolvency law and guidance to a set of circumstances that weren’t foreseen at the time the guidance was prepared. It's taken a combination of knowledge, experience and common sense to make distinctions between dishonest directors and unlucky ones who can’t repay Bounce Back Loans.

If the loan has been used responsibly, liquidation would bring an end to that debt. An insolvency practitioner will look for evidence that the loan has been used to benefit the business. For example, it could have been applied toward equipment or inventory. Or it might have supported a sensible income level for company director(s).

Do you need more information about personal liability and Bounce Back Loans?

If your client is concerned they could be made personally liable for repaying a company Bounce Back Loan, then please call our expert team of licensed insolvency practitioners on 08450 705959. We provide free and confidential advice to all AIA members on how best to help their clients through times of financial difficulties.

You don’t need me to tell you that managing your money laundering, terrorist financing and proliferation financing (ML/TF/PF) risk is a legal requirement for accountancy service providers. But a surprising number of people I speak to in the industry are still failing to give AML the attention it requires. 

Regulations have changed and continue to change. Controls are getting tighter and there is increasing scrutiny on the sector. According to recent research by Credas Technologies, accountancy service providers saw fines increase by 1,083% between September 2021 and September 2022.

In this article I look at what you need to do to avoid these fines and stay compliant. And why it’s so important to do so.

What must you have in place?

The Anti-Money Laundering and Counter-Terrorist Guidance for the Accountancy Sector (AMLGAS), issued in July 2022, puts huge emphasis on implementing a risk-based approach. Your firm is required to develop policies and procedures that enable every relevant employee to assess and mitigate risk, in every area of operation.

But what does this look like in practice?

1. You need to appoint an MLRO (Money Laundering Reporting Officer). All employees must know who the MLRO and any deputy is. If you’re the MLRO in your firm, make sure your door is always open.
2. Publish clear anti-money laundering compliance policies and procedures. Just having the documents saved in a file or on a computer somewhere is not enough. You need to educate your employees in AML/CTF/CPF - and be able to prove you’ve done so. 
3. Risk-assess your firm and every client whenever there’s a change or annually (whichever happens first). 
4. Undertake due diligence and ongoing monitoring for all clients. You also need to identify who the company’s ‘beneficial owner(s)’ is. More on that below.
5. Carry out training for relevant employees, agents and senior managers. As we’ve said above, your employees need to be trained in your firm’s AML/CTF/CPF policies and procedures. They also need to be familiar with updates to the AML legislation, or other legislation relating to financial crime and terrorism. You’ll need to prove this training to your Supervisor. 
6. Show your employees what a Suspicious Activity Report (SAR) is, how to make one and, most importantly, what they should report. To protect your firm from being complicit in ML/TF/PF they must be empowered to recognise and report suspicious activity to your MLRO.
7. Make sure your employees understand what tipping off is and how to avoid doing it: it carries a two-year prison sentence or an unlimited fine.

Knowing your client isn’t enough

Having a client for many years, knowing them personally or simply collecting a copy of their passport and trusting they are who they say they are, is not enough to satisfy your Supervisor on their next inspection. 

Electronic verification can give you access to vast amounts of data on people on various databases, such as lists of known terrorists/terrorist organisations or politically exposed persons (PEPs). There’s also the option of biometric identification, which checks your client’s image against their government ID. But beyond this, you need to know who it is you should be running the checks on - the ultimate beneficial owner.

You must be able to identify and name beneficial owners of your client’s business, and supply the requisite details about them to Companies House. If your client is based overseas, information supplied to the Register of Overseas Entities will be verified and the entity will need to update its information annually, in accordance with the Economic Crime Act 2022. 

Penalties for non-compliance

In February 2022, a Midlands-based tax firm was fined £16,891 by HMRC for not having risk assessments for new clients or an up-to-date set of AML policies. There were also many clients that the firm didn’t hold any verified ID for. 

AMLGAS clearly sets out “the systems and controls that businesses must possess, as well as the related offences that can be committed by businesses and individuals within them by failing to comply with relevant requirements.” (1.1.8 AMLGAS 2022)

The biggest threat to your firm is not being able to prove that you have these systems and controls in place - and that you’re using them - when your supervisory visit comes around. This alone can result in large fines.  If they also discover that your failure to implement suitable processes and procedures has caused your firm to unwittingly become involved in ML/TF/PT the penalties can be disastrous. 

They start at censure and fines…and could end in imprisonment. To say nothing of the reputational damage you and your company could suffer. But there are other potential ramifications. If you do get caught up in an investigation into money laundering then the courts have the power to freeze your business bank account. With no access to your bank account, carrying on your business is likely to be impossible. 

Getting your AML in shape

As you weigh up your AML risk management, it’s worth taking the time to remember exactly why you’re doing it. According to a 2021 UK Government report, “the most common offences to appear alongside a modern slavery prosecution in the last three years were: supply and possession with intent to supply a Class A drug, money laundering and exploitation of prostitution.”

This criminal activity cannot happen without regulated businesses and professions willingly or unknowingly facilitating it. As the NCA puts it: “Virtually all high-end money laundering schemes, and several cash-based ones, are facilitated by the abuse of legitimate processes and services. Accounting and legal professionals, and estate agents, can be criminally exploited – this is sometimes complicit, sometimes negligent, and sometimes unwitting – and this small minority of people can pose a very significant threat.

Every business in the UK uses the services of an accountant or bookkeeper, yet the NCA’s UK Financial Intelligence Unit’s ‘Suspicious Activity Reports annual report 2020’, covering the period April 2019 to March 2020, showed that accountants and tax advisers made just 5,347 Suspicious Activity Reports - less than 1% of the total made. By comparison, money services businesses, or MSBs, made 17,701 in the same period.

There’s no question that the accountancy and tax sectors could be doing more. If they don’t, the Treasury has the power to make them. With potentially devastating consequences for the firms that aren’t prepared. 

Richard Simms, MD of FASimms and AMLCC, is a licensed insolvency practitioner, chartered accountant and a leading authority on anti-money laundering. He is a sought-after guest at Accountancy and AML conferences worldwide due to his position at the pulse of changes in guidance and legislation that impact DNFBPs. 

The post-covid landscape has not been kind to UK businesses. Economists from Goldman Sachs have predicted that UK inflation could top 20% as recession looms and fuel prices spiral. In recent research by business insurance company Simply Business, 54% of small business owners cite rising fuel and energy costs as the biggest challenge for them right now.

If your client’s business is struggling with rising bills and heading towards insolvency - or is already in an insolvent position - it’s likely that liquidation is a word that’s been batted around. It might not be what they want to do. But when faced with what seems like an impossible situation, they may feel like they have little or no choice in the matter.

That’s not always true. In this article, I’ll look at the potential solutions available to a business in distress that are an alternative to liquidation.

Informal arrangement

For most businesses in trouble, an informal arrangement will be the first option to consider. If the money owing is to one or two creditors, and your client has a good relationship with them, then this type of arrangement is worth pursuing. The key here is for the client to be able to maintain a strong relationship with those owed money and therefore to prevent enforcement action against the business happening without advance warning.

For the creditor, an informal arrangement will sometimes be preferable to a formal one. If the creditor company is a supplier, they might have an eye on doing future business with the indebted firm.

The advantage for your client is that they have the flexibility to create bespoke arrangements with each creditor. It’s important that the creditor agrees that the new payment terms replace the existing terms. Although please be aware that your client cannot show preferential treatment to one creditor over the other. If they do end up in a formal liquidation process, any informal arrangement will be looked at by the licensed insolvency practitioner (IP) and any preferential situation will be reviewed.

The first step in an informal arrangement is to contact the creditor directly to explain the situation your client’s company is in and to request a discussion on setting a plan in motion. 

Once they agree to this, it will be your job as the distressed firm’s accountant to help them put forward a credible case to the creditors, based on a detailed cash flow forecast. This means having to prove that any plan to repay the debt is realistic and achievable. With your expertise you’re ideally placed to help your client devise this plan, which will prove the longer-term viability of their business.

In cases such as these we’re often called upon to provide a sanity check of any proposal.

It’s generally worth consulting an IP before you go to your client’s creditors with any type of offer. They are best placed make sure that it’s fair and legal, so that you can avoid any negative repercussions for your client.

One problem with informal agreements is that by their nature they are informal. The lack of a legally binding terms means that at any time the creditor may back out of the agreement and pursue legal action against your client’s company, leaving them completely unprotected. It’s vital that all steps and decisions are properly recorded so that the business owners and the advisors are not exposed to litigation if the informal arrangement doesn’t go to plan. A paper trail of agreements with each creditor will be very important.

Creditors’ Voluntary Arrangement (CVA)

We regularly use a CVA to provide a sustainable business with the breathing space it needs to stabilise. It will mean compromise from creditors in return for payment from future profits. But that is better for them than the alternative of a possible no return in a liquidation.

Although similar to the informal arrangement discussed above, a CVA is legally binding. All (unsecured) creditors must also get the same pence in the pound.

Working with an IP, your client will need to create a plan for repayment of their debts, which will then be sent to their creditors. The creditors will then respond to the action plan by voting, at a creditors’ meeting, on whether to accept it.

If it’s accepted, your client will then need to work with the IP to implement the action plan and set up a schedule of monthly repayments. This schedule will determine how much each creditor is paid each month and how long the CVA will last (usually three or five years).

Remember that the terms of a CVA can be flexible. For example, we’ve seen occasions where creditors have accepted a CVA where a liquidation may have looked like the only option. The significantly lower cost and speed of distribution to creditors can mean a quickly and higher payment to creditors.

Administration

If your client’s company is insolvent but has a core business that works, company administration is a way of protecting it from legal action by creditors and from potential liquidation. It essentially puts the company’s financial situation on pause while the company director(s) work with an IP to see how – and if – the business can be saved.

Your client’s company needs to have a predictable cash flow and significant assets or value to make a company administration viable. If an administration is decided on and entered into, the company’s chosen IP becomes the administrator during the process.

It’s the IP’s role to look at cash flow and assets, to see what’s working…and what’s not. They will then send a proposal to the company’s creditors, detailing the situation and confirming whether they believe the company can be rescued. If rescue looks possible, they will also set out how the company will repay its debts.

A pre-pack administration might also be an option. In this case, all or some parts of your client’s business and its assets will be sold to a different company, which in some cases may be owned by the existing company director(s). The proceeds from the sale repay the creditors as much as possible and the old company can be liquidated. Your client’s business, under the new company, can then carry on trading without the debt. Have in mind any business sale must be for market value.

Of course, the viability of these options will very much depend on the company’s individual situation. For some, liquidation might be the only way forward. If so, remember that - in some cases - they can still start again. Sometimes after buying the goodwill and assets of the old company. This is a complex process that must be handled by an IP so that the correct steps are followed. The same principle applies: as it is administration any sale of assets or goodwill must be for market value.

For businesses that are in a bad position now but have good long-term prospects, liquidation can be avoided. With careful planning, these businesses can be guided through and onto a better future.

Richard Simms is a licensed insolvency practitioner, chartered accountant and MD of FASimms. If you think your client could benefit from insolvency or business rescue advice, call 01455 555444 or email us at enquiries@fasimms.com for more information about how FASimms can help.

Most business owners who took out a BBL during the pandemic spent it as they were supposed to. But what happens if they didn’t…?

How seriously should you take the prosecutions for Bounce Back Loan fraud?

A recent MPs’ report estimated that £5bn of the £47bn spent on the Bounce Back Loan Scheme (BBLS) has been lost to fraud. While recent news coming out of The Insolvency Service shows companies being wound up and directors being disqualified for the misuse of the BBLS, I ask the question: are these the only consequences we’ll see for defrauding the taxpayer?

Bounce Back Loans (BBLs) were designed to provide a lifeline for businesses struggling to stay afloat due to the effects of the covid lockdowns and subsequent restrictions. Do not forget the majority of the loans were taken for genuine reasons and utilised appropriately during extremely unusual circumstances.

The speed with which the scheme was introduced meant loopholes were left wide open. This invariably meant that unscrupulous company directors took advantage of what was seen by some at the time as free money. You might remember the reports of businesspeople openly admitting to buying sports cars and other luxury good with their loans.

While potential disqualification might be a wake up call for some to ‘come clean’ about the misuse of their BBL and make arrangements to make good, for many it may seem like a worthwhile price to pay.

What are the potential consequences for misusing a BBL?

Repayment of funds

The Insolvency Service is able to initiate a Court Order for the company director(s) concerned to repay the misused funds. Likewise, banks are working with the British Bank and enforcement authorities to recover the money claimed fraudulently. A Confiscation Order, which allows the courts to recover the proceeds of crime following a conviction, is also a definite possibility.

A criminal investigation

If the company director(s) concerned have committed criminal offences or other regulatory breaches, The Insolvency Service may refer them to their internal criminal investigation team, the police or a regulator (if they’re in a regulated sector). They may then be subject to a criminal investigation and the loss of reputation, business and potential legal consequences that comes with it.

It’s important to remember that using the money attained through fraud, which is what the misuse of a BBL is, is money laundering. The NCA successfully achieved the conviction of 3 men who had, amongst other money laundering charges, attained £10m in fraudulent BBLs.

Jail time

In June 2022, Abdulzarzag Zagroba became the first person to be prosecuted by The Insolvency Service and receive jail time for misuse of a BBL. If you read the details of the case you’ll see that there were clear signs of fraud and misuse, which could not be explained away.

An extension of a Bankruptcy Order

For sole traders who have been through an insolvency process, they could have their Bankruptcy Order extended. This means that they will continue to be restricted in their borrowing, business activities and impacted by their credit rating for potentially years longer than necessary.

What advice should you give clients?

If your client has received a BBL - however they’ve spent it - it must be repaid. If it isn’t, the company may be investigated, even if it’s already been dissolved.

If the company sees no prospect of repaying the BBL, an option is for your client to liquidate their company, so that the outstanding debt is settled as much as possible. The liquidator in charge will investigate to ensure the BBL has been used as it was intended.

As an insolvency practitioner, I’m seeing more business owners than ever looking to cut their losses. It takes knowledge and experience to view each situation in the context of the past 2.5 years and determine which directors have - and have not - acted honestly in the face of an unceasingly hostile climate.

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 gives The Insolvency Service new powers to tackle directors who dissolve their companies to avoid paying debts. This makes it much harder to strike off a company that still has an outstanding BBL. Which is why we advise seeking the help of an insolvency practitioner (even if the company is solvent) before your client takes any action.

Has your client misspent their BBL?

If your client has used their BBL for purposes other than to keep their business going (or draw an appropriate income) during the pandemic (case studies on misuse can be found on The Insolvency Service site), they need to seek advice as soon as possible. As you can see above, there are consequences worse than disqualification. Potentially much worse.

I mentioned previously, using a BBL fraudulently is money laundering. If you suspect that your client has intentionally fraudulently obtained or fraudulently misused their loan, as a regulated professional you have a legal duty to submit an SAR to your MLRO - or to the NCA if you’re the only employee in your firm.

There’s the possibility that your client’s conduct could be reported by a concerned party, or discovered during an insolvency process. If it’s discovered during the investigation that you were aware of your client’s money laundering and did not submit an SAR, you could also be subject to a criminal investigation.

Richard Simms is a licensed insolvency practitioner, chartered accountant and expert in anti-money laundering. He is also MD of FA Simms and the Anti Money Laundering Compliance Company (AMLCC).

If you think your client could benefit from independent Bounce Back Loan advice, call 01455 555444 or email us at enquiries@fasimms.com.

UK businesses are under assault from every side. Global supply shortages, inflation, staff shortages, hugely increased energy costs, Brexit, governmental uncertainty and the crisis in Ukraine have created a perfect storm - and many are being blown off course. 

PayPal’s latest annual ‘Business of Change’ report found that 78% of small firms cite the cost-of-living crisis is the biggest threat to their survival in the coming year. Two-thirds of Britain’s small business owners told PayPal that the past two years have been the most challenging since they started their venture – and 47% fear the next 12 months could prove even more difficult.

One of our biggest roles in a time of crisis is to guide clients through challenging financial circumstances.

For those with a chance of survival, it’s about taking stock of their current position and identifying the possible futures. These are the steps that we take a business through when we hope to rescue it. As the closest person to your clients’ financial position, you might already be doing some - or all - of this with them.

1. What does your client want for the future?

The last two+ years have taken their toll on 1000s of business owners. Some might have viable businesses but not the impetus to continue. So the first thing to determine is what their aspirations are for the future.

Do they want to evolve their current business?

Do they want to look at changing their business?

Do they want to extract any profits and walk away?

Or even, are they in an insolvent position and need a formal process to save their business?

2. Which parts of the business are essential? And which are not?

If your client is solvent and has made the decision to stay in business, it’s important to define where they want to end up. Or put another way, if where they are now is Point A, what’s their ideal Point B? To get to B, they might have to make small adjustments, or big changes.

This is the time to take stock of their business and look at every aspect - from brand to employee costs and premises. Try to sort these into categories of essential obligations, contractual obligations and optional obligations.

3. What if…?

Once you know how vital each aspect of your client’s business is to its running, it’s important to look at whether, in Point B, this will be the same or different. Or whether it even has a place at all. Premises is a good example of this. It might be essential now but do they need it for the future?

It’s important that you help your client to see things objectively. Think about the cost, whether a contract can be broken, and the value of the part of the business you’re examining. It might be best for the business that any owned premises, to continue the example, are used in another way to create income. Or that your client downsizes or employs a work-from-home model.

4. The cash-flow forecast

Your client will need to understand that their ideal Point B might have to change, depending on how the cash-flow forecast looks in different scenarios. It might be that their dream Point B is not possible now but Point C, D or E is the best option. Again, you will most likely need to help them be objective about this and remove sentimentality from the decision of which direction is best.

5. Taking action

By this stage, your client should have a clear view of what needs to be done to make the changes in their business. These changes might be able to happen quickly. They might take some time and careful guidance from you.

I’m sure this is a role you’ve been used to playing since the beginning of the covid crisis. For them to have the best chance of success, continue to be by their side to give sound advice…and probably some gentle encouragement to overcome any challenges.

Richard Simms is a licensed insolvency practitioner, chartered accountant and MD of FASimms. If you think your client could benefit from insolvency or business rescue advice, call 01455 555444 or email us at enquiries@fasimms.com for more information about how FASimms can help.

There is much doom and gloom about the UK economy right now with the coronavirus pandemic set to cause the deepest recession in Britain for 300 years. Many companies, large and small, face the prospect of administration. But rather than fear it, could it be a blessing in disguise?

The Azzurri Group has recently been sold out of administration, saving around 5,000 jobs.

Steve Holmes, chief executive of Azzurri Group, said: “Despite being a successful operator, the immediate loss of revenue during lockdown meant that we have had to make some incredibly difficult decisions to protect the business for the long term. 

“Additional investment has enabled us to preserve the majority of our restaurants, stores and jobs and I am confident that, under TowerBrook’s ownership, Azzurri will navigate the period ahead successfully.”

How could administration benefit the company?

The ‘breathing space’ administration affords is one of the main benefits, but it is far from the only one.

• Move forward debt free

Negotiating deals to pay off creditors means you can move your business forward debt-free. This increases your scope for investment in technology, staff, product development and marketing/PR. It could also give you a competitive advantage over rival businesses carrying a debt burden.

• Create a more agile business

Too often companies operate a business model ‘because we’ve always done it that way’. Streamlining is an inevitable part of the administration process, giving you the opportunity to work better with customers, suppliers and staff.

For example, the coronavirus pandemic has shown many firms that they can operate without having to rent office space (or they can vastly reduce their office-space requirements).

Mike Hampson, chief executive of Bishopsgate Financial, told the ‘thisismoney’ website the company is “ditching [its] swanky offices in London”. The business employs 18 people but following the lockdown he has realised that the staff only needs to meet a couple of times a month to operate, and all will be working remotely.

• Save jobs – and the wider economy

Unlike insolvency, where all jobs are lost, administration means there’s a good chance some jobs will be saved.

And by continuing to trade, your company is helping others by doing business with them – and so the wider economy. The government benefits too, from an increased tax take and spending less on social security programmes.

• Enhance your business reputation

Taking a company into administration and bringing it out the other side leaner and more fit-for-purpose shows you have solid business acumen and are not afraid to make tough decisions when they need to be made.

Types of Administration

Administrations generally resolve in four ways: with a CVA, with a pre-packaged insolvency sale, with a healthy, stable business, or with liquidation/dissolution.

For the purposes of this article we will focus on the first two.

• Company Voluntary Arrangements (CVA)

CVAs are a common way of dealing with potential insolvency. Working with a licensed insolvency practitioner (IP), you must work out a schedule for repaying your debt – also outlining what percentage of the debt you will be paying back.

A CVA is a formal arrangement that must be overseen at all stages by the IP, who ensures creditors are paid the right amount and on time.

Creditors vote to accept the proposal, and in many cases approve because they accept that having some of their debt repaid is better that none at all (which could be the case with liquidation).

The process has also been used by clothing store All Saints, Hotter Shoes and high street giant Debenhams. 

• Pre-pack

Insolvency trade body R3 describes a pre-pack as: "Where the sale of a company’s business and/or assets is arranged before the start of an insolvency procedure then completed immediately or shortly after the procedure begins. Proceeds from the sale are used to repay the company’s creditors.”

Pre-packs take place when an IP agrees a pre-pack is the means of achieving the best possible returns for the company’s creditors (all pre-packs are overseen by an IP).

Bed retailer Dreams and Blacks Leisure are examples of where a pre-pack has been used successfully. 

The Corporate Insolvency and Governance Bill

The focus of the Corporate Insolvency and Governance Act 2020, which came into force on 26th June 2020, introduces a formal ‘moratorium’ - an initial period of 20 business days - during which no legal action from the majority of creditors can be taken against a company without court permission.

It will allow SMBs extremely valuable time to seek help from an IP - only a licensed insolvency practitioner can supervise a company entering a moratorium - and formulate a rescue plan.

Going into administration can be daunting. But with the right help it need not be the end of the line for your business. You could emerge debt-free (or with much less debt), leaner, with a clearer plan for the future.