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Director Disqualification: Insolvency Service announces a new enquiry process relating to potential abuse of COVID-19 Government financial support scheme

Our Director Disqualification Solicitors look at what is being proposed and some examples of fraudulently taken loans

In several recent articles, our Director Disqualification solicitors have commented on the growing number of Insolvency Service (‘IS’) investigations into the potential abuse of the Bounce Back Loan (‘BBL’) scheme, and other Government funded Covid-19 financial support schemes. This will inevitably lead to more Director Disqualification Orders. Whilst the ‘IS’ has not yet published official statistics on the number of Director Disqualifications arising from  COVID-19 support scheme abuse, it has confirmed that such investigations are resulting in mid to high bracket periods of disqualification, covering a range of misuse of support funds and inaccurate applications.

In this article, we highlight some typical examples of misconduct that the IS investigate and look at the new enquiry process introduced by the IS for alleged abuse of the Covid-19 financial support schemes.

Examples of the nature of Covid-19 financial support scheme abuse

Here are some case examples from the IS. They give a flavour of how the support schemes have been abused by delinquent Directors.

  • 1 director, 3 companies, 3 BBLs of £50,000 with no evidence of any company trading. Total BBL amount = £150,000

          Mr A was the sole Director of 3 limited companies. Mr A caused each of the companies to obtain a £50,000 BBL when there was no evidence that any of the companies had traded, and therefore they were not eligible for the loans. A 13-year Disqualification Undertaking was accepted by the Secretary of State.

  • 2 Directors, 2 companies, 2 BBLs of £50,000 obtained, but  records indicate turnover was over-estimated on both applications. Total BBL amount = £100,000

          Mr B applied for a £50,000 BBL on behalf of company A declaring on the application form that the company had a turnover of £200,000. Records indicate that company A’s actual turnover was no more than £7,600 and, therefore, it was not eligible for a BBL of any amount. Furthermore, there was no evidence to support the Director’s account of the money being used for the economic benefit of the company. An 11-year Disqualification Undertaking was accepted by the Secretary of State.

          His co-Director Mr C was shown to have either caused  or allowed the above misconduct. Furthermore, as sole Director of Company B,  he caused the company to apply for a £50,000 BBL declaring on the application form that company B had a turnover of £200,000, despite actually turning over £37,500.

          As well as massively overrating the company’s turnover, Mr C also failed to demonstrate that the BBL monies were used for the economic benefit of his company. Not surprisingly, the Secretary of State for Business, Energy and Industrial Strategy accepted a 10-year Disqualification Undertaking.

What we are seeing?

We, too, are seeing similar cases. For example:

In late December 2021, we were approached by a Director who took no less than 20 BBLs for 20 dormant companies, netting £1,000,000 of Government funds, and then used the funds to buy property in the names of his family members, prior to liquidating all 20 companies, it was not surprising that the IS were hot on his heels.

Ultimately we were not instructed by the Director, his having disagreed with our honest and robust advice that he was facing an impossible task of mounting a plausible defence. We anticipate that criminal investigations will also be launched against him, and a disqualification is not the extent of his troubles.

The IS’s new process

The IS has identified an opportunity to improve the targeting and investigation of cases where potential misuse of one or more Government- backed COVID-19 support schemes has been identified and is flagged by the office-holder/Director.

In these cases, a standard enquiry letter will be issued to the office-holder as part of the IS’s initial review. The IS says:

“The information sought in this letter will enhance case targeting decisions by ensuring the Insolvency Service has the fullest possible summary of the circumstances surrounding the obtaining and disposal of funds through the support scheme(s). This is preferable to opening an investigation simply based on a company having obtained funds from a support scheme, to then establish there is no misconduct associated with that action. The information  gathered through these initial enquiries ensures cases can be prioritised and  resources can be used effectively.

The standard enquiry letter seeks to establish what support scheme(s) the  company accessed, details of the amount received, dates of applications, eligibility for the scheme and evidence of overstatement of turnover.

The enquiries also seek to identify if any support scheme funds were paid to  the director(s) or any connected party, what explanations the director has given for how the funds were used, and if the director has since paid money into the company.

Further questions seek to establish if any recovery action is being taken, what  level of on-going trading activity there has been since the support scheme funds were received, and if repayments towards any support scheme funds have been made.

Office-holders will also be asked to provide company bank statements and  any bank analysis undertaken.”

They go on to say:

“Through experience gained in investigating these types of cases the Insolvency Service has found that establishing this information is crucial to the success of an investigation. Obtaining it as early in the process as possible, will make the targeting and progressing of investigation cases more efficient.”

Comment by our Director Disqualification Solicitors

The National Audit Office in its December 2021 report concluded that £4.9 billion had already been lost to Covid-19 fraud of the £47 billion of public money dished out in BBL. Faced with such a glaringly large number, it is absolutely right that the IS is doubling down on its efforts to  investigate and punish the directors responsible.

As a final comment, worryingly, we are also seeing an increasing number of Directors who quite legitimately took BBL/Coronavirus Business Interruption Loan Scheme monies, but who then suffered company failure, being wrongly targeted for Director Disqualification/financial recovery/punitive action of the types mentioned above.

In such circumstances, the well-advised director should contact our Director Disqualification solicitors. The sooner we are contacted, the more we can do to help. Click here to see some of our testimonials.

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