Big business faces restrictions on dividends and bonus payments - Boodle Hatfield

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29 May 2020

Big business faces restrictions on dividends and bonus payments

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The government has increased the maximum amount that a UK business can borrow under the Coronavirus Large Business Interruption Loan Scheme (CLBILS).

The changes, which came into force on 26 May, enable businesses to borrow up to 25 per cent of their turnover, subject to an upper limit of £200 million. Previously, the maximum loan available under the scheme was £50 million.

However, businesses borrowing more than £50 million through the CLBILS are subject to a number of restrictions whilst they repay the loan, including:

  • Dividends: unless declared prior to the date of the loan, borrowers cannot make any dividend payments;
  • Share buybacks: borrowers must agree not to undertake any share buybacks, save for a de minimis share buyback from an employee (excluding members of senior management) who is retiring or ceasing to be employed by the business;
  • Executive pay: cash bonuses cannot be paid, and senior management pay rises are also prohibited unless they were agreed in writing before the date of the facility, or are in keeping with similar payments made in the preceding 12 months and do not have a materially negative impact on the borrower’s ability to repay the loan.

Businesses borrowing up to, but not over, £50 million through the scheme are able to continue to make dividend payments, but will not be able to increase these whilst any facility remains outstanding.

£27 billion of government-backed loans advanced by lenders, including £18 billion Bounce Back Loans

The changes to the CLBILS came as the government announced that (as of close of business on 24 May) over £27 billion worth of government-backed business loans have been approved since the Coronavirus Business Interruption Loan Scheme (CBILS) was first set up in March. Of this, over £18 billion has been advanced solely through the Bounce Back Loan scheme.

Bounce Back Loans were introduced at the beginning of May following weeks of pressure on the government to increase the guarantee that they provide to lenders from 80 per cent to 100 per cent of the amount advanced. It was argued that this would speed up the lending process and ensure that those businesses that urgently needed cash would be able to access it quickly. A business may borrow a Bounce Back Loan of between £2,000 and up to 25 per cent of their turnover (subject to a maximum loan of £50,000).

Bounce Back Loans have certainly proved popular and the application approval rate is far higher than that of the other schemes; on 24 May, nearly 80 per cent of all Bounce Back Loan applications had been approved, compared with 50 per cent under the CBILS and 30 per cent under the CLBILS. Unsurprisingly, where lenders benefit from a government guarantee for the full amount borrowed, they appear more likely to approve a loan application.

Whilst Bounce Back Loans have provided thousands of UK businesses with a lifeline during the coronavirus pandemic, there is growing concern that it is now too easy for borrowers to take on debt that they will not be able to repay. Stephen Jones, Chief Executive of UK Finance, has warned that “all businesses should consider carefully their repayment obligations before completing a Bounce Back Loan application.” Borrowers have been reminded that they are taking on debt finance, not being given a government grant.

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