Fast cars, fancy watches and emergency finance – the challenges presented by CBIL’s fraud

Coronavirus Business Interruption Loan Scheme

2020 was reportedly the best year for expensive watch sales. Similarly the demand for luxury high end cars also rose dramatically. Why would extravagant purchases of this nature being made in the middle of the pandemic and during an economic crisis? Where has this liquidity come from? Could it result from the abuse of “CBILS”?

CBILS stand for the Coronavirus Business Interruption Loan Scheme. This was a government scheme introduced by the UK Chancellor in March 2020. It led to £20 billion being lent across 80,000 separate facilities. CBILS closed for new applications on 31 March 2021.

CBILS loans may be of varying duration but important characteristics of a CBIL are that the first year of the loan is interest free and the fees for arranging a loan are paid for by the government. An attraction to a CBILS loan was that the banks could not seek any form of security for the first £250,000 lent. Further, a government guarantee is in place for up to 80% of the sums lent (or £50,000 depending on which sum is the greatest).

A common misconception is that CBILS are grants – they are not. A CBIL is a debt which needs to be treated as such by the business. A second misconception is that it is government money when, in fact, it is money advanced by the bank. Government involvement is limited to the payment of the charges and interest due on the loan for the first 12 months and the guarantee. However, the guarantee is only engaged where the loan was advanced under certain conditions and where certain conditions have been complied with regard to any enforcement action if the loan goes into default.

This inevitably leads to a number of very serious problems. There was widespread abuse of the CBILS. CBILS were intended to replace lost turnover with borrowing. The notion was that once a company is back up and trading it ought to be able to pay its borrowing back. While in lockdown the CBILS loan could be used to pay fixed costs a business could do nothing about. It was a way of preventing companies going immediately into insolvency.

However, a number of CBILS loans were used for other things such as the acquisition of property, with the acquisition of plant and machinery running a close second. Given the lending condition not to seek security, the attraction for businesses was that the debt would not then attach to the asset.

A further serious problem with CBILS is fraud committed by a significant minority of borrowers. If a business is not trading and it suddenly receives a large sum of money that effectively sits on the top line of the balance sheet. Dishonest and misfeasant directors may simply withdraw that money straight out of the company and then use it to purchase personal items – such as luxury watches and cars. When businesses default on loans in such circumstances we can expect to see a significant amount of insolvency litigation as the banks and insolvency practitioners pursue misfeasant directors.

One of the causes of the above problems was that the loans were based on very limited due diligence by the banks. Huge volumes of businesses sought lending and large amounts of money were being lent but lockdown restrictions meant due diligence on borrowers was extremely limited or completely restricted. No doubt as banks attempt to unwind their CBILS lending we will see a significant, possibly overwhelming, amount of litigation for banks. At Clarke Willmott our insolvency lawyers, recovery specialists and expert banking litigators are ready to assist with the unravelling of some of these facilities in a time which may otherwise be overwhelming.