The Insolvency Service continues its stance against BBLS abuse, as the number of director disqualifications more than doubled in a year

A Manchester law firm made a request under the Freedom of Information Act 2000 (FOI) in respect of the Bounce Back Loan scheme (BBLS), and the number of directors that were disqualified where the company had taken out a BBLS facility.

The response from the Insolvency Service published on 18 January 2023 provides insight into the largescale fraud and misuse of the scheme, since its inception in March 2020 following the Covid-19 pandemic, and the measures taken to clamp down on this abuse of the scheme.  It found that the number of director disqualifications has more than doubled in just a year.

The scheme

The BBLS allowed for SMEs to borrow between £2,000 and up to 25% of their turnover, with the Government guaranteeing the loan.

The maximum loan value available was £50,000.

Of all the Government backed lending schemes available during the pandemic, the BBLS was the biggest, distributing £47 billion to around 1.6 million Companies.

It is estimated that fraud losses were at £4.9 billion at the end of March 2022, although this estimation has since reduced to £3.5 billion.

Due to the pressures received from HM’s Treasury, banks within the scheme softened its measures, and in some cases removed the requirements for credit checks, meaning that borrowers instead had to self-certify that they met the following criteria:

• The company was based in the UK and affected by COVID-19; and
• The company was trading as of 1 March 2020 and not insolvent as of 1 December 2019.

Consequently, lenders paid loans to:

• Already dissolved companies.
• Companies incorporated after the pandemic hit.
• Businesses that showed no evidence of trading at all, either before or after March 2020.
• Businesses that were trading after March 2020, but not before.
• Businesses with no evidence of having traded before or after the qualifying date of 2 March 2020, but did have other businesses active in this period, raising concerns that the money was siphoned off to the other companies.

Between 1 May 2020 and 31 March 2022, 16,589 companies in England, Scotland and Wales that had taken out a BBLS facility, entered insolvency via compulsory liquidation, creditors’ voluntary liquidation or administration.

Director disqualifications and the approach taken by the Insolvency Service

The BBLS has led to widescale fraud and misuse, which in turn, has resulted in the Insolvency Service taking a forceful approach in countering these issues, seeking the disqualification of directors on behalf of the Secretary of State for varying periods of time.

The Insolvency Service will usually write to individuals and request that they sign a disqualification undertaking, which once signed and accepted, has the effect of a court order.

The periods of disqualifications appear to vary and are determined on a case by case basis. However, such periods average between 6 and 9 years, with 15 years being the maximum, based on recent cases.

Acting as a director while disqualified is a criminal offence and may also make the individual concerned personally liable for company debts.

Directors are also at risk of receiving a court order for compensation to be paid to creditors in instances where there has been abuse of the BBLS.

This therefore shows that individuals cannot simply sign an undertaking (where they may not be concerned about the prohibition on acting as a director / engaged in the management of a company) and be done with the matter.

312 individuals have so far been struck off under the Company Directors Disqualification Act 1986 during the current financial year in respect of situations where the companies had taken out a BBLS facility. Given that the previous year saw around 140 disqualifications, the BBLS has had a huge impact on the disqualification of directors, with the Government seemingly keen to tackle widescale fraud which occurred during a chaotic period.

Recent Cases

In a recent case regarding N&S Solutions Ltd, a cleaning services company which entered into administration in August 2019 (and subsequently entered into liquidation in June 2020), its director applied for a BBLS facility of £30,000 in May 2020, notwithstanding that the company was insolvent and had ceased trading. The director signed a disqualification undertaking with a disqualification period of 9 years.

An alternative measure available is for the winding up of companies. LV Distributions Ltd and SIO Traders Ltd were wound-up in the High Court in separate hearings on 27 July 2021 following confidential enquiries conducted by the Insolvency Service, which proved neither company ever traded and one of the entities submitted false documents to at least 41 local authorities and the Government’s Bounce Back Loan scheme to secure £230,000 worth of grants put in place to support businesses during the pandemic.

Another alternative is for the individuals’ bankruptcy restrictions to be extended. The directors of a Nottingham takeaway joint, Mujeebullah Khan and Muhammed Omair Javaid improperly applied for a BBLS of £50,000 in the name of business after the company was sold, and the proceeds were used to repay a company creditor who was also a relative of one of the directors.  The directors each received extensions of their respective bankruptcy restrictions for 8 years.

The current wave of disqualifications in respect of the abuse of the BBLS will seemingly continue, as the Insolvency Service looks to ameliorate the issues caused by the misuse of the BBLS since its implementation.

Contact our Insolvency team.