Bounce back loan fraud, director disqualification and account freezing orders.
As the country came to a grinding halt in March 2020, the Government was faced with the inevitable task of trying to save thousands of businesses already facing a tightening financial noose around their necks within weeks of the first national lockdown.
The raft of Covid support measures, from the hurriedly implemented Bounce Back Loan Scheme ('BBLS') and the furlough scheme, provided a welcome relief for many businesses. Indeed, government figures suggest that in the absence of the scheme, up to 500,000 businesses would have permanently ceased to trade in 2020.
However, the scheme has suffered significant exploitation, with many people defrauding it for their financial gain despite the proviso that the loans were only to be used for the economic benefit of the company.
Although the Government has suggested that over £2.2 billion of fraudulent applications were prevented as a result of the checks implemented by lenders, it has become glaringly apparent that the checks were wholly deficient. Indeed, with mounting pressure from the Treasury to speed up the loan distribution, many basic checks fell by the wayside. Matters were magnified by the British Business Bank's stance of prohibiting lenders from carrying out any credit checks.
It is not surprising that the scheme was rife for manipulation. The tick box self-certifying application required directors to confirm two simple criteria.
- They were based in the UK and were affected by COVID-19.
- They were in business as of March 2020 and not insolvent as of 1 December 2019.
Given the above, it is unsurprising that PwC reported to the Government that the schemes resulted in an eye-watering estimate of £3.5 billion in fraud losses.
Notably, it isn't just the errant directors who received loans they were not entitled to that are being targeted. We have seen a sharp increase in the number of directors facing financial claims, and director disqualification claims as a result of not understanding or misinterpreting the application criteria and restrictions on how loans were to be used.
The significant losses to the public purse have emboldened the Insolvency Service to protect the public from errant directors and pursue the recovery of funds. The number of director disqualification bans for bounce-back loan fraud has naturally increased.
The Insolvency Service has, in the main, pursued bans for:
- Misconduct in applying for a bounce-back loan that the company was not entitled to in part or full.
- Misapplication of a bounce-back loan, where funds have not been used for the economic benefit of the company.
Word of warning ...just because the company is now dissolved does not mean you're in the clear!
Suky Mann
Directors disqualification
The Insolvency Service has continued to secure a growing number of director disqualifications for bounce-back loan fraud and misconduct. Often pursued in conjunction with compensation orders, disqualifications for bounce-back loan misconduct are increasing at exponential rates.
Indeed, a recent Insolvency Service press release revealed that a Birmingham-based director had been disqualified for 12 years after fraudulently claiming £50,000 through the Government scheme. The company received a bounce-back loan of £50,000 shortly before it was placed into liquidation. The funds remained in the account when the company was wound up. As the bank accounts were frozen, the director presented the company bankers with a forged document, suggesting that the winding up had been rescinded. The account was unfrozen, and the director immediately transferred £70,000 (including the £50,000 bounce-back loan monies) from the company bank account to his personal account.
While the above case is an example of blatant and contrived misuse of a bounce-back loan, a steady number of cases have arisen from far less headline-grabbing facts. In those cases, having the right advice will often make the difference in determining whether the Insolvency Service should continue with its investigations.
But how has the bounce-back loan misconduct changed the Insolvency Service's pursuit of directors?
Account Freezing Orders
The Insolvency Service has a potent tool in its armoury, and there has been a steady rise in the number of Account Freezing Orders ('AFO') being obtained by the Insolvency Service.
A freezing order is an interim injunction that restrains any disposition or dealing of the defendant's assets, with the intention of preserving assets until a judgment can be obtained or enforced. Account freezing orders are now being utilised to tackle bounce-back loan fraud.
It provides an immediate ring-fencing of assets to enable the Insolvency Service to undertake its investigations without fearing assets being dissipated to frustrate eventual recovery action.
The impact of an account freezing order in conjunction with dealing with an insolvency service investigation will be huge. Not only can it impact your ability to continue running your business, but it will also invariably have an immediate impact on your personal life.
Responding to an account freezing order is key. We can help you vary or set aside an account freezing order, minimise its impact and assist you in dealing with the underlying Insolvency Service investigation.
Summary
The impact of a director disqualification ban, lasting between 2 and 15 years, should not be underestimated. Not only are such bans all too easy to breach, but the professional and personal consequences are far-reaching and can include the following;
- Restrictions on current/future employment and business interests
- Criminal penalties if a disqualification order or undertaking is breached.
- Compensation orders.
- Other financial penalties – e.g., personal liability for company debts if a disqualification order or undertaking is breached.
- Professional and personal embarrassment.
- Potential claims by the liquidator/administrator of the company.
With such high stakes, seeking legal advice from a specialist director disqualification solicitor is a must.
Word of warning ... just because the company is now dissolved does not mean you're in the clear!
The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 gives the Insolvency Service powers to investigate and, if appropriate, take action to disqualify directors of companies which have fraudulently claimed bounce-back loans, even if the company has since been dissolved. The Act has a retrospective effect and can take into account companies dissolved three years prior to the act coming into effect.
