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Protecting businesses from COVID19 related unsustainable debt
Background
- On March 3rd 2020 the Prime Minister told a Press Conference;
“I was at a hospital the other night where I think there were actually a few coronavirus patients and I shook hands with everybody, you’ll be pleased to know, and I continue to shake hands.”
On 23rd March 2020, the Prime Minister made a televised speech in which he announced the imposition of measures which collectively brought the workings of the economy to a halt. During his speech he said;
“I know the damage that this disruption is doing and will do to people’s lives, to their businesses and to their jobs.”
The Prime Minister also stated
“And I can assure you that we will keep these restrictions under constant review. We will look again in three weeks, and relax them if the evidence shows we are able to.”
“we are buying millions of testing kits that will enable us to turn the tide on this invisible killer.”
“We will beat the coronavirus and we will beat it together.”
3. On 28th March 2020 Bloomberg Politics reported that after three days of drama and amid growing alarm, an upbeat Johnson decided on March 19 it was time to rally his troops for the push toward victory. He bounded into the wood-panelled state dining room in No. 10 Downing Street, smiling and joking with reporters in front of him.
“I am absolutely confident that we can send coronavirus packing,” he defiantly declared. A new test could be a “game changer” in the fight against the disease, he said, adding that the U.K. could “turn the tide” of the outbreak in 12 weeks.
4. On 27th April in a speech delivered in front of 10 Downing Street the Prime Minister ejaculated;
“If this virus were a physical assailant, an unexpected and invisible mugger (which I can tell you from personal experience it is), then this is the moment when we have begun together to wrestle it to the floor.”
“And I know that without our private sector, without the drive and commitment of the wealth creators of this country, there will be no economy to speak of. There will be no cash to pay for our public services. No way of funding our NHS. And yes, I can see the long- term consequences of lock down as clearly as anyone.”
“And so, when we’re sure that this first phase is over and that we are meeting our five tests: deaths falling, NHS protected, rate of infection down, really sorting out the challenges of testing and PPE, avoiding a second peak. Then that will be the time to move on to the second phase, in which we continue to suppress the disease and keep the reproduction rate, the R rate, down, but begin gradually to refine the economic and social restrictions and one by one to fire up the engines of this vast UK economy.”
5. On 30th April during a daily Press Conference the Prime Minister stated that he would publish his roadmap for exiting the Coronavirus lockdown the following week and declared that ‘Britain is at the peak and on the downward slope’
6. On 4th May 2020 in the midst of the first national ‘lockdown’ HM Treasury announced on the Gov.UK website;
‘Britain’s small businesses will be able to apply for quick and easy-to access loans of up to £50,000 from today – with the cash expected to land within days.
7. On 20th May 2020 during a debate in the House of Commons the Prime Minister told MP’s he was confident the Government would have a world beating system to test, track and trace people with the virus by 1st June 2020.
8. The representation implicit in the statements cited above and others made during the period in question, was that the Government could bring the virus under control within a short period of time. His March 28th 2020 statement that the UK could turn the tide on the outbreak in 12 weeks and his statement on 27th April that ‘we have begun to wrestle it [the virus] to the floor’ are representative of the messages that were being placed by the Government into the public domain.
9. It has now become clear that the Government will only ‘control’ the virus and ‘wrestle it to the floor’ when the vaccine programme has been rolled out to a sufficient proportion of the UK population. Even when this has occurred, at the time of writing this report, there is no indication when the economy may fully be reopened and when businesses may be free to trade without being impeded by Government restrictions of one form or another. There is further uncertainty by comments from the scientific community that emerging variants of the virus worldwide could result in mutations which cannot be controlled by the vaccination programme.
10. It was reported recently in The Times 2nd January 2020 that;
‘The CityUK, a financial services trade body, has established the Recapitalisation Group to identify methods of addressing the debt mountain. It has projected that by March there will be £100 billion worth of “unsustainable debt”, including £35 billion-worth related to Covid-19 loans
11. A few days later on 7th Januaray 2020 it was reported
‘Banks are in discussions with debt collection agencies about using them to recover Bounce Back Loans, which are 100 per cent backed… Using debt collectors is seen by lenders, regulators and the Treasury as sensible given the scale of the task, which would otherwise require banks to hire thousands of staff and create new centres dedicated to recovery of the loans by the government. So far £43.5 billion has been extended to 1.4 million small businesses…Plans are being drawn up to create a panel of agencies that would take on the task of seeking repayment, for which they would receive a fee. Any unpaid debts would return to the banks, which would then claim on the government guarantee attached to the loans’T
12. Two issues arise from these reports. Firstly, for the lenders to be in discussion with panels of debt collecting agencies some eight months after the scheme was introduced would indicate to a reasonable observer that something has gone drastically wrong with the ‘bounce back’ scheme. Secondly, that lenders and the Government should consider it sensible to fund debt collection agencies to target and no doubt heap further misery on already ailing businesses, rather than using such funds to invest and support those same businesses, may be added to the ever-increasing list of dubious decisions since the inception of the outbreak.
13. We must not overlook, that despite the many terrifying features of SARS-CoV-2, it does not as yet have the ability to formulate and impose Government policy and Regulations. The Government must accept that as a matter of legal causation the mountain of debt created since March 2020 is directly the result of the policies it has pursued. Many are the examples of nation states that have acted to protect the health of the public whilst also protecting the economic interests of its citizens. The policy of the Government of Indonesia on vaccine priority groups provides the most recent example.
14. Europa Lawyers have been contacted by businesses who at the time of the first short notice lockdown in late March 2020 were effectively forced into borrowing under the Government’s ‘bounce back’ loan scheme. Although that is, of course, a Delphic phrase, at the time the lockdown was introduced, the Government, and the Prime Minister in particular, caused representations to be put into the public domain about the length of the lockdown and the period for which the economy would be subject to strangulation. It was clearly the intention of the Government that the public and the business community should rely upon these representations
15. As noted, at that time the Prime Minister assured that the lockdown was a temporary measure and included the assertion thatthe U.K. could “turn the tide” of the outbreak in 12 weeks. The inherent representation in these statements and based on which many businesses entered ‘bounce back’ transactions, was that after a short period of lockdown the economy would be reopened affording businesses who had borrowed under the scheme the ability to recover and, indeed, ‘bounce back’ from the effect of a lockdown lasting several months. Thereby they would be in in a position to service repayments under the borrowing. For businesses who borrowed in the early stages of the scheme repayments will fall due as early as May or June 2020.
16. It also appears to be unpolemical that in the period before the lockdown the Government made mistakes in its handling of the outbreak of the virus which has had a direct connection with the continuity of measures which have damaged the economy. ‘Professor Lockdown’ Neil Ferguson has admitted that from an epidemiological perspective this is the case.
17. No business who borrowed when the scheme was introduced or shortly thereafter could reasonably have foreseen that at the beginning of 2021 the country would be subject to a third lockdown with the strangulation of the economy continuing. At the time of writing, an accurate summation of the situation is that there is uncertainty as to when the economy may finally be in a position to start to recover from the effects of SARS-CoV-2 related Government restrictions.
18. The Government backed ‘bounce back’ loan scheme has generated a substantial amount of individual loan Agreements with corporate borrowers. These Agreements are subject to the same principles of English contract and transactional law as apply to contracts generally. For businesses laden with unsustainable debt borrowing and who have had no opportunity to ‘bounce back,’ there are potentially relevant doctrines in English law, namely misrepresentation, mistake, and frustration. Issues of implied terms and collateral contracts may also be relied upon by a borrower.
19. The purpose of this report is to analyse the legal doctrines available to businesses who have borrowed under the scheme and which may be invoked to protect their position with respect to unsustainable levels of borrowing
Misrepresentation
20. The component elements of an actionable representation have been set out recently in the judgment of Jacobs J in Vald. Nielsen Holding A/S, Newwatch Limited v Mr Victor Baldorino, Mr Richard Bennett, Mr Julian Mantell [2019] EWHC 1926 at para 132;
“A representation is a statement of fact made by the representor to the representee on which the representee is intended and entitled to rely as a positive assertion that the fact is true. Determining whether any and if so, what representation was made by a statement requires (1) construing the statement in the context in which it was made, and (2) interpreting the statement objectively according to the impact it might be expected to have on a reasonable representee in the position and with the known characteristics of the actual representee.”
21. Applying this statement to the scenario under review, the representor in question is the Government and in particular the Prime Minister. The representees were those at whom the Prime Minister directed his statements including those in the business community. The business community was entitled to rely on the statements of the Prime Minister as a positive assertion as to the time it would take to control the virus and thus the strangulation of the economy. That is the context in which the Prime Minister made his assertions. Objectively assessed, the impact which the representations might be expected to have on a reasonable representee in the business community is that the lockdown imposed at the end of March 2020 would last 12 weeks as a short-term measure intended to prevent the NHS from being overwhelmed by the SARS-CoV-2 outbreak. That after this period the lockdown would be lifted and the economy allowed to revive and restore to pre-March 2020 levels. It is difficult to conceive in what other way the Prime Minister and the Government might reasonably have expected such comments to have been received and understood. It is also difficult to conceive how the lenders involved in the processing of individual transactions could have otherwise understood the information being placed in the public domain.
22. Even if it might be argued that the Prime Minister and the Government were expressing an opinion as to the length of the lockdown and the time it would take for the economy to reopen, as Jacobs J points out at paragraph 134 of his judgment;
“At least where the facts are not equally well known to both sides, a statement of opinion by one who knows the facts best may carry with it a further implication of fact, namely that the representor by expressing that opinion impliedly states that he believes that facts exist which reasonably justify it. In the context of deceit, Chitty on Contracts 33rd Ed paragraph 18-14 expresses this in the following terms:
"Furthermore, at least where the facts are not equally well known to both sides, then a statement of opinion by one who knows the facts best will often carry with it a further implication of fact, namely that the representor by expressing that opinion impliedly states that he believes that facts exist which reasonably justify it. If he does not actually believe in such facts, it follows that he will be liable in deceit. In such a case, the test as to whether a statement of opinion involves such a further implied representation will involve a consideration of the meaning which is reasonably conveyed to the representee. The material facts of the transaction, the knowledge of the respective parties, their relative positions, the words of the representation and the actual condition of the subject-matter are all relevant to this issue."
23. Presumably when the Prime Minister made the relevant public statements, he must have reasonably believed that facts existed which justified his expression of opinion.In the case of ‘bounce back’ loan transactions entered as a result of the imposition of the first lockdown, it is reasonably arguable that borrowers under the scheme were induced to enter into individual transactions based on statements placed in the public domain by the Government which amounted either to false representation of the facts or an expression of opinion which, for the reasons stated. amounts to an actionable misrepresentation. The scenario in which statements about the lockdown were placed in the public domain, even if said to constitute statements of opinion, may also give rise to a form of tortious liability on the part of lenders as per authorities such as Esso Petroleum Limited v Mardon [1976] QB 801.]
24. As between commercial lenders under the ‘bounce back’ scheme and those who have borrowed whether individually or through corporations, prima facie a ‘special relationship’ within the Hedley Byrne v Heller principle would appear to exist. It might be argued on behalf of a lender that such misrepresentations which may have been made about the ‘bounce back’ loan scheme, were made not by a Party to individual ‘bounce back’ transactions, rather by a third party in the form of Governmental communications. The rule in this regard is stated in Chitty on Contracts Para 7.025;
“In order to ground relief to a person who has entered into a contract as a result of a misrepresentation, it is normally necessary that the misrepresentation should have been made either by the other party to the contract, or by his agent acting within the scope of his authority, or that the other party had notice of the misrepresentation; notice may be actual or constructive.”
25. It is not beyond the scope of reasonable argument that a court faced with an issue as to the enforceability of a ‘bounce back’ loan might find that the lenders under the ‘bounce back’ scheme should be deemed to have had notice, whether actual or constructive, of Governmental representations as to the length of the lockdown of the economy. It might also be possible for a borrower to argue that in the circumstances in which the ‘bounce back’ scheme was introduced, a form of collateral contract was created between individual borrowers and the state.
26. It might be argued in these circumstances that a Company entering into a ‘bounce back’ transaction did so on the basis of misrepresentations intended to be relied upon by the Director(s) and the Board of the Company. There is a potential analogy to be found here in cases in which a wife has been induced by a misrepresentation by her husband to give her signature to a charge over the matrimonial home. In one such case before the House of Lords it was held that the bank was prevented from enforcing the charge on the ground that it had constructive notice of the husband’s misrepresentation even though it had no actual knowledge of it.[1]
27. It is also an established principle of the English law of misrepresentation that it is not necessary that the misrepresentation should be the sole cause which induced the representee to make the contract. It is sufficient if it can be shown to have been one of the inducing causes[2]. Thus, in the scenario under consideration, a borrower need only establish that misinformation put into the public domain by the Government about the length of time for which the economy would be locked down, was one of the factors which influenced it in entering into a ‘bounce back’ Agreement on behalf of a corporate borrower.
28. Clearly a borrower entering a transaction with a lender under the scheme when introduced in May 2020 or shortly thereafter, had it been aware that restrictions would be in place well into 2021, the borrower would have been likely to raise with the borrower and made enquiry how the lender and the contract made provision for it.
29. The remedies available in English law in the case of a non-fraudulent misrepresentation are complex, however the primary remedy is recission of the contract subject to the power of a court to award damages in lieu of recission.[3] The challenge for a borrower under the ‘bounce back’ scheme would be in persuading court that the circumstances in which the ‘bounce back’ transaction came about the discretion should be exercised in favour of rescinding the ‘bounce back’ transaction in question rather than awarding damages in lieu of recission. A court must when considering an exercise of the discretion, consider the loss that would be caused to the representor. In this case that loss might amount to many millions of pounds of public funds depending on the number of ‘bounce back’ transactions that might be rescinded. However, it might be counter argued that the Treasury and lenders may reasonably have been expected to make appropriate provision in this regard. In this case also, any damages awarded against a lender in lieu of recission might result in action for indemnity by the lender against the Government which, in turn, might also lead to public funds being expended in any event in indemnity payments to lenders.
30. In any event a difficulty for the borrower is the principle of restitution in integrum as a perquisite to an order for recission of a contract. This would mean that a borrower arguing for recission of a ‘bounce back’ Agreement on the basis of a misrepresentation would have to make at the least substantial restoration of monies transferred to it under the Agreement in question. This may of course present a significant practical obstacle to many businesses whose ability to trade has been severely hampered by Governmental restrictions imposed since March 2020. However, this does not in principle affect the right of a borrower to seek damages for misrepresentation against a lender on Hedley Byrne v Heller principles.
Implied Terms and Collateral Contracts
31. The law of misrepresentation is not the exclusive tool available to a ‘bounce back’ borrower. Arguments based on collateral contracts and the implication of terms required to afford ‘business efficacy,’ to such transactions may be argued for. It might be argued that it falls to be implied into a ‘bounce back’ loan, particularly those entered into before a particular date, that repayments under the Agreement in question would only apply when the borrower could be shown to have had the opportunity to ‘bounce back’ this to be assessed according to a formula under the contract. Alternatively, it might be implied as a term of the contract that Governmental restrictions impeding the economic recovery were to be of a stipulated duration based on information placed in the public domain by the Government.
32. Without the implication of terms such as these into a ‘bounce back’ transaction, it is difficult from a legal perspective to see how these Agreements can be said to have ‘business efficacy’. The point may reasonably be made that the implication of such a term is necessary to avoid a borrower entering the contract on the basis of a consensus as to the length for which the economy would be locked down, only to find that during its duration the Agreement and the basis of it became something significantly different. Indeed, it might be argued that is precisely the position many borrowers find themselves in as a result of the continuing Government restrictions and the resultant effect on the ability of businesses to trade.
Mistake
33. Chitty on Contracts 33rd ed para 6-002 states;
“The doctrine of mistake takes account of a mistake as to the factual circumstances in which the contract is made only if the mistake was common, i.e., both parties made substantially the same mistake—for example, when an agreement was made to rent a room overlooking the route of a coronation procession, that both parties believed that the procession was scheduled to take place on the date concerned when in fact it had been cancelled. Common mistake cases are ones in which:
“both parties make the same mistake of fact or law relating to the subject-matter or the facts surrounding the formation of the contract.
34. Although the Government is not strictly a Party to an individual ‘bounce back’ transaction, it is the guarantor of lending under the scheme and any misunderstanding of facts by the Government is likely also to be attributed to lenders under the scheme. In the scenario under review, the facts surrounding the formation of the contract were the existence of a viral pandemic which caused the Government to take measures to lockdown the nation and the economy in March 2020. The Government might say that as the date the first lockdown was introduced it believed that restrictions on the economy would be needed for only a limited 12-week period but subsequently science established that longer term restrictions were required. That labouring under a mistake of fact, namely as to the nature of the virus and the period of time for which restrictions on the economy of one form or another would be required, it placed information into the public domain which proved to have been misleading. This caused individuals and businesses to rely on that information and to thus labour under the same mistake as to the facts when entering into Government sponsored SARS-CoV-2 lending schemes.
35. If a court were to find that a ‘bounce back’ Agreement was entered into on the basis of a common mistake as to relevant facts at the time the Agreement was made, the effect is to nullify consent to the subject Agreement.On the restitutionary question, some interesting questions arise. The Government may have been mistaken at the time the scheme was introduced as to the duration for which restrictions of one form or another would be required. However, it can hardly be asserted that it was this mistake that caused the scheme to be introduced and payments made by lenders to borrowers under the scheme. If anything, but for the mistake the scheme might have been expected to be much more generous in terms of the funds available to borrow.
36. Significantly for borrowers in Barclays Bank Ltd v W.J. Simms, Son and Cooke (Southern) Ltd [1980] QB 677 Robert Goff J. qualified the principle of recovery of monies paid under a common mistake by stating that a claim may fail if:
“(a) … the payer intends that the payee shall have the money at all events, whether the fact be true or false, or is deemed in law so to intend; or (b) the payment is made for good consideration, in particular if the money is paid to discharge and does discharge, a debt owed to the payee (or a principal on whose behalf he is authorised to receive the payment) by the payer or by a third party by whom he is authorised to discharge the debt; or (c) the payee has changed his position in good faith, or is deemed in law to have done so.”
37. Many borrowers under the ‘bounce back’ scheme will, of course, have changed their position in good faith. Indeed, the change in their position will have been forced on them by the actions of the Government. As restrictions affecting the economy have been imposed and reimposed and businesses ability to trade has been prevented, many will have had no choice but to increase their level of indebtedness to their lender.
38. In Kleinwort Benson Ltd v Lincoln CC [1999] 2 A.C. 349 Lord Hope observed
“The payee cannot be said to have been unjustly enriched if he was entitled to receive the sum paid to him”.
A borrower under the ‘bounce back’ scheme who satisfied the criteria to borrow under the scheme would clearly have been entitled to receive the sum transferred and thus, invoking Lord Hope’s statement, cannot be said to have been unjustly enriched.
Had the Government known that restrictions would need to be imposed for a far longer period than it envisaged when the scheme was introduced in May 2020 it could hardly argue that it would not have made the payment in question. If anything, this would suggest that it would have recognised the need to provide a higher level of support under the scheme’
Frustration
39. Another doctrine which might be preyed in aid is that of frustration. In Davis Contractors Limited v Fareham U.D.C [1956] A.C. 696 Lord Radcliffe stated the test as follows:
“… frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from that which was undertaken by the contract. Non haec in foedera veni. It was not this that I promised to do … There must be … such a change in the significance of the obligation that the thing undertaken would, if performed, be a different thing from that contracted for.”
In the same case Lord Reid put the test for frustration in a similar way:
“The question is whether the contract which they did make is, on its true construction, wide enough to apply to the new situation: if it is not, then it is at an end.”
40. In National Carriers Ltd v Panalpina (Northern) Ltd [1981] A.C. 675 Lord Simon restated the test as follows:
“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”
41. By reference to the circumstances in which many ‘bounce back’ loan Agreements have been entered, it may be reasonably argued that an event has supervened which so significantly changes the nature of the outstanding contractual rights and/or obligations from that which the parties could reasonably have contemplated at the time of their execution that the Agreement is frustrated. That supervening event is the imposition by the Government of restrictions affecting the economy and the ability of borrowing businesses to trade, well beyond the period represented when the scheme was introduced.
42. This leaves many businesses with repayment obligations in a dramatically different scenario in which their businesses have been effectively prevented from trading for a prolonged period, in which they have not been able to ‘bounce back’ and which causes their obligations under the Agreement in question to have become unduly onerous and in many cases impossible to service. Contractual commitments which have been rendered unsustainable by events beyond the control of the borrower are in themselves likely to hamper the ability of the businesses in question to ‘bounce back’.
43. More recent authority supports a broader approach which seeks to take account of all of the facts and circumstances of the case when deciding whether or not a contract has been frustrated. This “multi-factorial” approach has regard, among other factors, to the following:
“… the terms of the contract itself, its matrix or context, the parties’ knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties’ reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances.”[2]
44.In these circumstances a court may well conclude in a given case that it would be unjust to hold a borrower to the terms of the agreement given the changed circumstances since the Agreement was entered into for which the borrower has had no responsibility and which cannot be shown to be due to any default on its part. In these circumstances the outcome should be that the borrower is discharged from its obligations under the ‘bounce back’ Agreement.
Certainly, it may be asserted that blanket Government restrictions imposed in response to a major public health episode said to have been paramount to an emergency, are a paradigm example of what the law deems to amount to a frustrating event.
45. The prinicpal consequence for a ‘bounce back’ borrower is that they would be discharged from further performance under the Agreement with the lender i.e they would he discharged from further repayments and any interest element. However s 1(2) Law Reform (Frustrated Contracts) Act 1943 provides;
“All sums paid or payable to any party in pursuance of the contract before the time when the parties were so discharged (in this Act referred to as ‘the time of discharge’) shall, in the case of sums so paid, be recoverable from him as money received by him for the use of the party by whom the sums were paid, and, in the case of sums so payable, cease to be payable:
Provided that, if the party to whom the sums were so paid or payable incurred expenses before the time of discharge in, or for the purpose of, the performance of the contract, the court may, if it considers it just to do so having regard to all the circumstances of the case, allow him to retain or, as the case may be, recover the whole or any part of the sums so paid or payable, not being an amount in excess of the expenses so incurred.”
46. Thus a lender would be entitled to recover monies paid under the contract prior to the frustrating event. In the case of Government restrictions imposed since March 2020 is is an interesting question precisely at which point they may in law have amounted to a frustrating event.
Summary
47. A business burdened with an unsustainable level of ‘bounce back’ indebtedness at a time when it has not had an opprtunity to ‘bounce back’ may seek to challenge its obligations using a combination of doctrines discussed in this report.Given the dichotomy between the information given by the Government when the lockdown and the ‘bounce back’ scheme was introduced, and the facts as they have subsequently transpired, a borrower would have an arguable case that such information was the product of a misrepresentation by the Government giving rise to Hedley Byrne liability or a form of opinion or prediction encompassed by the Esso v Mardon line of authority. Alternatively if the Government were to argue that misrepresentation was not involved in information placed in the public domain, in the lights of the facts as they have emerged since March 2020 it would be a challenge for it to argue that it was not mistaken as to the facts and by defintion so were borrowers. Such finding by a court would provide a potent escape route for borrowers from unsustainable debt, including any obligation to repay sums paid under the scheme. The doctrine of frustration further adds to the armoury of the borrower.
48. If it were established that both parties entered the ‘bounce back’ Agreement on the basis of a common mistake as to the facts surrounding the length of time Governmental restrictions would be required, then borrowers have an arguable case the their Agreement should be deemed void ab initio. If their position has changed in good faith it is also arguable that any sums received under the scheme should not fall to be repaid.
The Corporate Veil Doctrine
49. One must also not overlook the strength of the corporate veil doctrine in English law. In Petrodel Resources Ltd v Prest [2013] 2 A.C. 415 The Supreme Court held that the doctrine of English law which enabled the courts in very limited circumstances to pierce the corporate veil was only to be invoked where a person was under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evaded or whose enforcement he deliberately frustrated by interposing a company under his control.
50. Lord Sumption at paragrapgh 8 of his judgment observed;
”Subject to very limited exceptions, most of which are statutory, a company is a legal entity distinct from its shareholders. It has rights and liabilities of its own which are distinct from those of its shareholders. Its property is its own, and not that of its shareholders. In Salomon v A Salomon & Co Ltd [1897] AC 22, the House of Lords held that these principles applied as much to a company that was wholly owned and controlled by one man as to any other company…The separate personality and property of a company is sometimes described as a fiction, and in a sense it is. But the fiction is the whole foundation of English company and insolvency law. As Robert Goff LJ once observed, in this domain “we are concerned not with economics but with law. The distinction between the two is, in law, fundamental”: Bank of Tokyo Ltd v Karoon (Note) [1987] AC 45 , 64”
51. Based on the judgments in Prest there are only 2 basis on which it would appear the Director(s) of a corporate borrower might be made liable for the indebtedness of a company to a lender under the ‘bounce back’ scheme. Firstly if it might be said that case represented an exceoptional circumstance which allowed the court to pirece the corporate veil and hold the Director(s) liable for the debts of the Director(s). Alternatively if it might somehow be argued that a company’s debt under the ‘bounce back’ scheme was a form of chose in action held by the company on Trust for the Director(s). As to the latter, the concept of a form of intangible property which confers a detriment as opposed to a benefit being held on Trust for an individual(s) is entirely at odds with the concept of a beneficfiary of Trust property.
52. At para 16 in Prest Lord Sumption commented;
“There is a range of situations in which the law attributes the acts or property of a company to those who control it, without disregarding its separate legal personality. The controller may be personally liable, generally in addition to the company, for something that he has done as its agent or as a joint actor. Property legally vested in a company may belong beneficially to the controller, if the arrangements in relation to the property are such as to make the company its controller's nominee or trustee for that purpose.
It might be argued that a Company Director entering into a ‘Bounce Back’loan did so as the agent of the company or as a joint actor with the company. However it would not appear to the case that merely causing a company to enter into a contractual arrangement renders the Directors of the company its agents for that purpose. Nor is there anything in a simple loan Agreement which would suggerst that the company is made the controller’s nominee or trustee for that purpose.
53. Piercing of the corporate veil may occur in cases involving fraud. At para 18 Lord Sumption commented;
“The authorities show that there are limited circumstances in which the law treats the use of a company as a means of evading the law as dishonest for this purpose.”
54. It is difficult to conceive on what basis this would apply to permit piercing of the corporate veil in the base of ‘bounce back’ Agreement. The eligibility criteria for borrowing under the scheme ensured that only legitimate companies established by a specified date were able to apply for funds from lenders.
55. At paragragh 27 Lord Sumption commented;
“In my view, the principle that the court may be justified in piercing the corporate veil if a company's separate legal personality is being abused for the purpose of some relevant wrongdoing is well established in the authorities.”
56. A company director relying upon the doctrine of the corporate veil in English law can hardly be said to be abusing the company’s separate legal personality for the purpose of some relevant wrongdoing. He would simply be relying on the doctrine to protect against any personal exposure for the debts of the company. That is simply a ntaural consequence of the corporate veil doctrine and not a wrongdoing.
57. At paragraph 28 Lord Sumption after referring to the concealment principle said;
“The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it which exists independently of the company's involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement.”
58. Again, this would not appear to provide a basis to pierce the corporate veil in a ‘bounce back’ loan case. The lender has no legal right by virtue of a ‘bounce back’ Agreement against the person in control of the company. Nor is the company being interposed to defeat such right or to to frustrate its enforcement. Rather a company director in this situation is simply relying on the suual effect of the corporate veil doctrine in English law.
59. At paragraph 34 Lord Sumption commented;
“These considerations reflect the broader principle that the corporate veil may be pierced only to prevent the abuse of corporate legal personality. It may be an abuse of the separate legal personality of a company to use it to evade the law or to frustrate its enforcement. It is not an abuse to cause a legal liability to be incurred by the company in the first place. It is not an abuse to rely on the fact (if it is a fact) that a liability is not the controller's because it is the company's. On the contrary, that is what incorporation is all about.”
“The objection to that argument [i.e., that the corporate veil should be pierced] is obvious in the case of a consensual liability under a contract, where the ostensible contracting parties never intended that anyone else should be a party to it. But the objection would have been just as strong if the liability in question had not been consensual.”
60. Thus a company relying on the corporate veil doctrine in the context of the ‘bounce back’ loan scheme would be unlikely to be held to be acting so as to abuse the corporate personality. Neither the lender nor the corporate borrower intended that officers of the corporation should be a party to it.
61. To properly advise a business on its liabilities in respect of unustainable borrowing under the ‘bounce back’ scheme the terms of the Agreement in question will need to be carefully examined. However one or more of the doctrines discussed in the report are likely to be relevant to liability.
62. Companies concerned they may have unsustainable levels of debt under the ‘bounce back’ scheme, especially those who borrowed in the early stages following the introduction of the scheme in May 2020, would be well advised to raise their legal concerns with their lender and give notice that they call on the lender to invoke the 100% Government guarantee of the borrowing.
63. Despite the many legal issues which arise concerning the circumstances in which ‘bounce back’ borrowing has taken place, there is clearly a political responsibility on the Government to assist businesses burdened by unsustainable levels of debt due to Governmental information and Governmental restrictions. The most obvious way to achive this is to invoke the 100% Government guarantee, at least in respect of ‘bounce back’ Agreements entered into before the facts as to the full duration of Government restrictions became clear.
64. Alternatively, perhaps by analogy with schemes such as the Student loan Scheme, repayments should only fall due when it can be shown that a business has been able to bounce back to a specified percentage of its pre-March 2020 income levels.
65. In the absence of a Government initiative to assist businesses burdened with unustainable borrowing under the scheme, and given the Treasury is reported to be supporting placing enforcment in the hands of debt collection agencies before honouring the 100% pledge, it is those businesses who are informed as to their legal rights who are most likely to survive and thrive in the future.
Graeme Wood Barrister England & Wales & Republic of Ireland
Europa Lawyers
18th January 2020
