Home » Case Studies » Director Disqualification Case Studies » Bounce Back Loans: The Insolvency Service abandons its allegation of unfit conduct and its director disqualification investigation against our clients

Bounce Back Loans: The Insolvency Service abandons its allegation of unfit conduct and its director disqualification investigation against our clients

The Unfit Conduct allegation: ‘Trading to the detriment of the Crown and causing the company to apply for a Bounce Back Loan while insolvent.’

By: Neil Davies, Solicitor and Managing Director of N D & P Solicitors Ltd (‘NDP’) and Contributory Editor to ‘Mithani: Directors’ Disqualification’ – the leading work on Director Disqualification law and practice.

This case study looks at 2 issues:

  1. A specific case of alleged misapplication for and alleged misuse of a Bounce Back Loan (BBL) by our Director client;
  2. Some wider lessons gleaned and wider points of interest, in relation to: The Director Disqualification regime generally; and the consequences of Director Disqualification that can follow for the Director.

Overview

The Insolvency Service (‘IS’) are targeting Directors who have fraudulently applied for BBL’s and/or misused BBL’s.  Such disqualification claims are often accompanied by financial compensation claims against the Director personally. This case study details how following our instructions, the Insolvency Service dropped its Director Disqualification investigation and, as a result, could not pursue its intention of bringing a Director Disqualification Compensation Order against our clients.

Some recent developments

The IS have reported in recent days that they have obtained Director Disqualification Undertakings in BBL casesas follows:

  1. A 9-year directordisqualification ban against a Director for having exaggerated his company turnover to claim a £31,000 BBL.
  2. A 6-year director disqualification ban for paying a £50,000 BBL to a form company Director in breach of the terms of the BBL Scheme.

Background to this BBL/Director Disqualification case

In our case, the Director clients (husband and wife) faced the prospect of director disqualification for a likely period of between 5 to 9 years, if the above Unfit Conduct allegation was made out against them, arising out of the liquidation of their limited company business. The potential for much wider consequences such as Director Disqualification Compensation Orders (on which see below) was indicated as a very real consequence, by the IS in this case, if Director Disqualification Orders were made or agreed.  The possibility of Criminal Law investigation also always has to be factored in, to the client advice in such circumstances.

The company had operated a series of licensed bars. The hospitality sector was of course massively hit by the Covid-19 lockdown from March 2020. Notwithstanding the absence of customers and trade, the company nevertheless still had ongoing obligations to pay its landlords, its Bank, local authorities and its suppliers. Despite the company’s best efforts, those liabilities eventually tipped the company over into insolvent liquidation.

All the circumstances of the case

In short, nobody (including these Directors) expected the first lockdown to last so long. That factor, coupled with people’s changed habits, where they no longer went out so often eating drinking socially once lockdown eased and ended, killed the company’s trade. A number of other factors, unknown to the IS that were clearly relevant (they are not set out here), were brought to the attention of the IS by NDP. That consideration of ‘all the circumstances of the case’ was, as ever, vitally important on the facts of this case.

The action taken by our Director Disqualification specialists

NDP on instruction immediately engaged in correspondence with the IS. We invited the IS to particularise the allegation of ‘applying for the bounce back loan when insolvent’ that it was investigating and alleging as Unfit Conduct, on the facts of this case.

The IS here made a sweeping, generalised allegation of suspected Directorial Misconduct, in the initial stages of their investigation. Do not accept that IS approach.  The Director is entitled to know the precise case and allegations of Unfit Conduct he/she has to answer.  The IS is obliged to detail and particularise its claim. The Director should settle for nothing less than the full details of the allegation.

To compound matters, the IS indicated that it would, if it successfully pursued Director Disqualification, also seek an Order against both Director clients, seeking a Director Disqualification Compensation Order (‘DDCO’), in other words an application for compensation payable by the Directors personally, in respect of the BBL.

That compensation equated, on the facts of this case (as in many other such cases) to the amount of the BBL.

What is a DDCO? When can it be applied for?

A DDCO can only be applied for by the IS if there is a Disqualification Order made, or a Director Disqualification Undertaking is agreed by the Director.  Without a Disqualification Order/Undertaking, there can be no DDCO made.

The IS can apply to the Court for a DDCO and the Court can make such an Order if the Director is subject to a Disqualification Order or Undertaking and their conduct has caused a quantifiable loss to one or more creditors of a company that has entered administration, liquidation or been dissolved.

The IS most commonly seeks Compensation Orders and Compensation Undertakings in relation to BBL and Crown debt cases.

What should the director do?

It remains therefore vitally important to:

  • Challenge and respond to the Direct Disqualification investigation.
  • Remember that even if Director Disqualification is accepted by the Director or ordered by a Court, it still does not automatically follow that a DDCO will be made.

Next steps: Avoid the Insolvency Service’s draft evidence

We requested from the IS and received and looked at the BBL application form that the Directors’ clients had completed.  The form did indeed require the Applicant Directors to confirm that the company was not insolvent when the BBL was applied for.

We also requested from the IS the draft written evidence to be relied upon against the Directors.  There is a recent trend of the IS declining to provide draft evidence to the Director.  This IS Letter of Claim (‘the Section 16 Letter’) has we have noticed recently abandoned the offer to the Director to provide such draft evidence.  The Director should not accept that position.  Demand the evidence.  Know and understand the full detail of the case to be answered.

Our view of this case

Our having investigated with the Directors all of the circumstances of the case, it was certainly not clear to us, as experienced Insolvency and Director Disqualification Lawyers, that the company was in fact insolvent when the company applied for the BBL. It did however, become insolvent in the following months, as trade continued to plummet and suffer as the Covid-19 pandemic rumbled on.  That however was not the allegation of Unfit Conduct that was being pursued here.

Detailed letter of representations to the Insolvency Service

On behalf of our Director clients, NDP wrote a detailed letter of representations to the IS, disputing and refuting both allegations of Unfit Conduct (see the heading to this article), given all the circumstances of the case.  The Directors, who had ‘lived’ the company, were able to give us lots of relevant factual information that was previously unknown to the IS.   We then communicated that information to the IS in the most effective fashion. 

The outcome

The IS ultimately confirmed that it was abandoning its director disqualification claims in this case.

Lessons to be learned and wider points in Director Disqualification cases

  • The IS does (in many cases) withdraw the threat of Director Disqualification (both in relation to BBL allegations and all other allegations of Unfit Conduct) if it can be demonstrated to the IS by the Director, that the allegations are not made out on the facts of the case (that is where we come in).
  • The Director best achieves that above goal by demonstrating to the IS (who are of course strangers to the affairs of the liquidated company) precisely what went on before and in the run up to liquidation, with the Director giving full context and factual background that led to the demise of the company.

Documentary evidence

The Director should where possible always support his/her position in responding to the IS with documentary evidence, to include:

  • Contemporaneous emails (with customers, suppliers, HMRC, Banks and other funders).
  • All other written material, to include:

Board Minutes,

Any diary (of what was happening on the ground) and evidencing what was in the mind of the Director at the time of the alleged misconduct (here, in particular, the BBL application) and

Subsequent Lawyers papers and advice from other professionals (for example Accountants and Insolvency Practitioners), cashflow forecasts, correspondence with suppliers, creditors etc, can all be helpful when put into proper context.

  • Witness Statements (supported by a Statement of Truth) from key witnesses, to include employees, Accountants, suppliers etc. Such Witness Statements are often invaluable, in persuading the IS to abandon Unit Conduct allegations.

Provide an explanation. Why did the company fail?

Explaining why the company eventually failed is a big part of that Director response.  As much detail as possible on this key issue, supported by documents is vitally important.

A meeting with the Insolvency Service

Even where the IS maintains an intention to pursue Director Disqualification, attending a meeting with the IS Investigator (with legal accompaniment) remains a vitally important tool in the toolbox of the Director, to ensure that the necessary messages are best communicated to the IS. The tactics and conduct of such a meeting justify an entire article to itself.  ‘Lawyer up’ is the message here for any such meeting.  The IS does listen, as it is obliged to do.

Conclusion~: define the Director’s objectives at the outset

These may include:

  • Doing whatever is needed to avoid disqualification.
  • And/or seeking a lesser period of Director Disqualification.
  • And/or accepting a Director Disqualification Voluntary Undertaking to be disqualified, whether or not coupled with an Application for Permission from the Court to continue as a Director or in the management of a limited company business, despite disqualification. 
  • Defending an issued Court case seeking Director Disqualification through the Courts.

Whatever the objective, we are best placed to help.

Contact us or call us on 0121 200 7040 if you have received a letter from the Insolvency Service regarding its intention to undertake a director disqualification investigation and a possible subsequent Director Disqualification Compensation Order, and would like to know how we can help.