Over half of director disqualifications in the UK from April 2022 to June 2023 were connected to the abuse of pandemic support programs, particularly the Bounce Back Loan (BBL) scheme, according to a recent report in the Guardian.
It is believed that around 25% of UK businesses benefited from BBLs at the peak of the Pandemic, however, 752 directors who claimed funds have since been disqualified by the Insolvency Service for abusing pandemic support schemes.
Whilst the government has revised its estimate of losses from the BBL scheme to £1.1bn, down from the previous figure of £4.7bn, the Insolvency Service is still actively pursuing criminal prosecutions in more cases under the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, which was introduced back in 2021.
But realistically, how bad is the situation, and how likely is it that HMRC or The Insolvency Service will take action?
How widespread was Bounce-back Loan fraud?
In the past year, 1,200 directors have been disqualified for their involvement in fraudulent activities related to Covid-19 loan schemes, with more than half of these cases, linked specifically to the abuse of BBL.
This highlights serious flaws in the government’s scheme, which was launched by the then-Chancellor Rishi Sunak in May 2020 as a vital support system for small and medium-sized businesses.
Under the scheme, applicants could secure loans of up to £50,000 without having to sign a personal guarantee, simply by completing an online application and satisfying a few basic criteria. While the majority of directors acted responsibly, there were varying degrees of abuse, ranging from criminal misconduct to personal gain. And the lax checks have been cited as the reason such abuse was allowed to thrive.
In one stand-out case of BBL fraud, 11 companies claimed £500,000 before suspiciously transferring the funds to entities in Hong Kong. These companies, supposedly operating out of London, Berkshire, Lancashire, and Shropshire, raised eyebrows as no trading premises could be found for any of them, and it still remains uncertain if they ever even conducted any business.
Theodore Agnew, a former counter fraud minister, expressed scathing criticism towards the government’s efforts in combating fraud and abuse of the BBL system. He resigned last year, calling their actions “desperately inadequate” and pointing out serious oversights that allowed companies to secure bounce-back loans without proper scrutiny.
The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill was introduced in 2021 to afford the HMRC and The Insolvency Service the opportunity to retrospectively investigate directors, with a view to disqualifying their directorship if they are found to have acted inappropriately.
In order to support strategic investment and investigation efforts in this vein, the Insolvency Service received over £100m in additional funding, with the hope of bringing more directors to justice.
Such investigations have since identified misconduct related to most of the government’s COVID relief initiatives, including the BBL, job retention schemes, and local authority grant scheme.
What responsibilities does a director have?
Directors have a crucial responsibility to the company and its shareholders. The Companies Act 2006 outlines several key duties they must uphold, including acting within their powers, promoting the company’s success, exercising independent judgment, and demonstrating reasonable care and diligence. It is also essential for directors to avoid conflicts of interest, refuse third-party benefits, and declare any interest in proposed transactions.
However, when a company faces insolvency, a director’s duties shift. The priority then becomes the best interests of the company’s creditors. Directors need to carefully manage the company’s assets before and during insolvency to ensure creditors are not further harmed. Even if directors are aware that the company is facing financial hardship, they must never engage in activities that worsen the creditors’ situation. Such prohibited actions could include;
- Attempting to trade your way out of financial struggles. ‘Wrongful trading’ when insolvency is a realistic proposition can incur additional liabilities and leave the business worse off, which will ultimately impact creditors.
- Disposing of company assets or making payments to shareholders if there has not already been a provision for creditors made.
- Disposing of company assets for significantly less than their market value. Doing so could result in these transactions being set aside or reversed, and this applies to undervalued transactions that occurred as far back as two years ago.
- Showing preferential treatment to one creditor over another, such as making one-off payments or transferring assets. All creditors must be treated equally, so if it can be proved that the directors, in entering into a preferential transaction, the contents of said transaction may be set aside.
- The act of ‘misfeasance’ refers to the improper distribution of dividends, or unauthorised loans or payments. Directors found to be guilty of such actions may be ordered to repay any money personally.
Whether or whether they are in their positions at the time of insolvency, directors must comply by the aforementioned obligations. They can still be held personally accountable for the firm’s debts as a result of their conduct while they were employed by the company, even after they became aware of its insolvency. They risk being disqualified, paying fines or even going to jail if they act in bad faith over these matters.
Disqualifying directors
In one example of BBL fraud that the Insolvency Service has cited, an owner of a car breakdown recovery service in Newport, south Wales, was discovered to have irresponsibly squandered a £50,000 loan. He was reported to use part of the fund to buy a new tow truck, whilst using the rest to feed a drug addiction. And to make matters worse, he eventually sold the vehicle to further fuel his habit.
Whilst this is clearly an exaggerated example, it does highlight the depths of ‘wrongdoing’ that can result in a director’s disqualification.
The law states that director can be disqualified if they are found to act in an ‘unfit’ manner. This could mean undertaking illegal or fraudulent activities or abusing their position of power and trust. This type of conduct does not even have to be deliberate; it can also be through negligence. Examples could include;
- Failure to keep proper accounting records.
- Failure to pay company tax.
- Failure to provide annual company accounts to Companies House.
- Failing to cooperate with the Insolvency Practitioner.
- Misrepresenting company facts.
- Withdrawing unwarranted salaries when the company was on the verge of becoming insolvent.
- Using company funds or assets for personal gain.
The Insolvency Service investigates businesses in insolvency or when a complaint is made against specific parties for inappropriate behaviour. If evidence is found that a director has not fulfilled their duties or acted inappropriately, a disqualification order under the Company Directors Disqualification Act 1986 will be pursued. This applies to appointed directors as well as anyone performing directorial functions.
Directors can voluntarily disqualify themselves to halt court proceedings, known as a disqualification undertaking.
What are the consequences?
Disqualification orders come with severe consequences. These orders can range from a minimum of 2 years to a maximum of 15 years.
Once given a disqualification order, individuals may find themselves personally liable for relevant company debts. Additionally, they will be banned from acting as a director for any UK-registered company or even an overseas company with UK interests.
Furthermore, disqualified directors will be prohibited from participating in the formation, promotion, or management of any other business. They cannot act as a liquidator or administrator in any capacity. They are also restricted from managing a company’s property or instructing a third party to handle management tasks on their behalf.
Membership or participation on a board of any charitable, educational, police, healthcare, or professional body will be forbidden. In order to become a trustee of an occupational pension scheme, consent will be required from The Pensions Regulator.
For the duration of the order, and possibly even longer considering the damage that having a disqualification order published publicly in the Companies House database will have on someone’s reputation, any management or directorship career will be unsustainable.
Because of this, if you find yourself the subject of an inquiry, you as the director must move proactively at the earliest chance to resolve the issue. This will require seeking professional assistance because failing to do so when necessary, could have severe personal and professional consequences.
