During the COVID-19 Pandemic, the three main COVID-19 pandemic loan schemes (the Bounce Back Loan Scheme, the Coronavirus Business Interruption Loan Scheme and the Coronavirus Large Business Interruption Loan Scheme) paid out nearly £80 billion to businesses to help them survive the Pandemic.

It has been reported that between £3.5 billion and £5 billion was wrongly claimed and that there will be a wave of Covid loan fraud cases, which will have to be determined by the Courts. 

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Distribution of the loans

The Bounce Back Loan Scheme was the biggest, distributing £47 million to 1.6 million recipients. Each recipient was able to borrow up to £50,000. Normally when businesses borrow money, banks apply stringent credit checks to help avoid fraud and to ensure that the loans can be repaid. However, amid pressure from the Treasury to speed up the distribution of the loans, it was agreed that no credit checks would be carried out on businesses applying for a loan under the Bounce Back Loan Scheme. Borrowers were instead asked to self-certify and confirm that they met the following criteria:

  • That they were based in the UK and affected by COVID-19; and
  • They were in business as of 1 March 2020 and not insolvent as of 1 December 2019. 

However, due to no credit checks being carried out, it has come to light that loans have been paid to:

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

Director disqualifications and winding up proceedings

In cases where the loan schemes have been found to be misused or abused, the Secretary of State has now been bringing director disqualification proceedings. Most of these disqualifications have been dealt with by way of the Secretary of State accepting a disqualification undertaking which is entered into voluntarily without the need for court proceedings. The disqualification periods sought have ranged from 2 to 15 years, although most appear in the middle, averaging 6 to 9 years, with 13 years being the highest disqualification period so far.  

The misuse of the loan schemes has also resulted in the winding up of companies. Since February 2021, the Insolvency Service has been successful in persuading the winding up courts to wind up five limited companies that were shown to have abused the loan schemes.  

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Extensions to bankruptcy restrictions

All directors have a duty to ensure that their companies maintain proper accounting records. Any failure to account for how a bounce-back loan was used or using the loan for personal payments can result in extended bankruptcy restrictions. For example, two directors of a takeaway shop had their bankruptcy restrictions extended for eight years. One of the directors had applied for a bounce-back loan of £50,000 in the business name after the company had been sold. The money was used to repay a business creditor, who was also a relative of his business partner.  

Dissolved companies

Under the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, the Insolvency Service has been given extra powers to investigate bounce-back loan fraud, in particular, to investigate cases where a company has been dissolved to conceal possible misuse of loans. Where misuse of the loan schemes is discovered, the Insolvency Service can take action to disqualify the former directors of those companies. This Act retrospectively allows an application for a disqualification order to be made up to 3 years after a company has been dissolved.  

What does this all mean?

Directors who have misused the various COVID-19 loan schemes are being handed relatively high periods of disqualification. The effects of disqualification can be devastating, particularly for owner-managed businesses where directors are actively involved in representing the business and in their absence, the company and its employees could be placed at risk.  

Once a disqualification order is made, the Secretary of State issues a press release, which the local and national media can pick up. This is adverse publicity which will be damaging to both the director and the company. The press release is intended to serve as both a deterrent to others and a warning to anyone who may have dealings with the director who has been disqualified. Disqualified directors are also included on a central Register of Company Directors, which is searchable by the public via the Companies House and Insolvency Service’s websites.  

Given the reported scale of the fraud and misuse of the loan schemes, other businesses may be inadvertently trading with other companies that are either directly involved in fraud, are insolvent or where directors have been disqualified. All businesses should have contingency plans in place to minimise any collateral damage should a company it is trading with cease to trade, or its directors are disqualified. Some practical steps businesses can take are:

Reviewing contractual arrangements

Make sure that contractual agreements are properly documented and include termination provisions. If the terms of any contracts are varied, these should be properly documented too. Parent company guarantees should also be reviewed to ensure that any action taken against a subsidiary company does not discharge the obligations of the parent company guarantor.  

Monitor cash control

All businesses need to have cash flow budgets and forecasts, which are reviewed regularly. The sooner an issue is spotted, the sooner action can be taken to try and put things right. All businesses should also have an effective credit control process to collect debts quickly and efficiently.  

Do your research

Businesses should always thoroughly research the relevant market and the other businesses they are trading with. A lot of information about companies and their directors can be found via websites such as Companies House and the Insolvency Service or by carrying out a simple internet search.  

Be proactive

If cash flow becomes an issue for your business, speak to your creditors and try and agree either to defer payments temporarily or to make instalment payments. If one of your debtors becomes insolvent, make a claim to the insolvency practitioner dealing with the insolvency process as soon as possible. It is also crucial to contact an insolvency practitioner as soon as possible if there is any risk of your business becoming insolvent so that advice can be taken on trying to save the business, minimising liabilities and maximising a return for the company’s creditors. 

Contact Our Insolvency & Restructuring Team

Myerson’s Insolvency & Restructuring Team act for insolvency practitioners, creditors, lenders, businesses and companies, directors and individuals who need advice on insolvency matters. You can contact the Team below. 

0161 941 4000