See what the criminal and civil courts are saying and doing to Directors for BBL fraud – from Director Disqualification to Director Disqualification Compensation Orders (‘DDCO’) to ‘go directly to jail’.
The very first BBL misuse/misapplication cases are now coming to Trial before the Civil and Criminal Courts in England and Wales. BBL transgressions, as alleged by the Insolvency Service (‘IS’), with director disqualification and possibly jail being the possible outcomes, most commonly take one of 2 forms being:
- Either overstatement by the Director(s) of company turnover in the BBL application form (resulting in an excessive sum being loaned);
- Misuse of BBL funds by the company once received, i.e., not using those BBL funds for the economic benefit of the company.
The clear messages emerging from recent Court case outcomes show that BBL misapplication and/or misuse by Directors can and will be punished by one or more of:
- Imprisonment or other criminal law sanction.
- Director Disqualification, including a prohibition on involvement in the promotion, formation or management (emphasis added – the word management is very widely defined) of a limited company business, for a lengthy period of time (unless Permission of the Court is obtained) to continue acting.
- Financial DDCOs against Directors.
- Costs Orders against the Director arising out of Court outcomes.
This article looks at:
- 3 of the first BBL cases to hit the Courts, which feature some very striking outcomes.
- Some of our recent experiences arising out of our representing very many Directors faced with BBL investigations and claims against them, from one or more of the Insolvency Service (‘IS’), other criminal prosecutors, Liquidators and others.
3 recent BBL Court cases
Case 1 – R v Dagistan (2023) – EWCA Crim636. Outcome: 18 months imprisonment
The key facts of this case are:
- This was a Criminal prosecution by the IS (cf: Ghimpu below) against husband and wife Directors. It involved a £50,000 fraudulent BBL application.
- In the Criminal Division of the Court of Appeal, 18 months immediate imprisonment was handed down for Fraud and Money Laundering Offences, for both Directors (reduced from 2 years on Appeal). The Court said:
‘….only immediate custody would sufficiently mark and punish the serious offending.’
- The custodial sentence was given despite some mitigating factors, which included full repayment of the BBL (but only after the criminal law investigation commenced) and no previous convictions.
- The Court noted the BBL Scheme was an exceptionally vulnerable target at a time of National Emergency (the Covid pandemic).
- However, the Directors now ‘enjoy’ the status of convicted money launderers and fraudsters.
- This was on its facts a blatant misuse case, but we ask why was this particular case chosen for criminal action rather than civil disqualification proceedings, such as Director Disqualification? We have surely all seen much worse abuse cases – we certainly have!
Case 2: Secretary of State v M Ghimpu (2023) – Re Deea Construct Ltd
False information in BBL application (Chief ICCJ Briggs) – OUTCOME – 13 years Director Disqualification and a £52,000 DDCO
- The company had turned over £4,500. The application to its bank for a BBL however stated the turnover was £200,000. The true entitlement was for a BBL of £2,000, but instead, a £50,000 BBL was received by the company.
- The Director, on receipt, paid the £50,000 BBL to himself/used it for his benefit, with the loan being obtained in October 2020.
- The Director put the company into Creditors’ Voluntary Liquidation 5/6 months later in April 2021. The Liquidator tried to recover the loan but was unsuccessful.
- The Court outcome, following an IS investigation was a 13-year Director Disqualification term, which started on 25 July 2023.
- £52,163 DDCO was obtained by the Secretary of State (‘SOS’) from the Court at the final hearing. The IS commented that the wrongful obtaining of the BBL gave the company an unfair advantage over other businesses.
Notes from this case
- This case was the first DDCO obtained by the SOS/IS from the Court. Many more have been obtained voluntarily without the need for Court proceedings, by agreement with Directors.
- Directors are, in our experience, agreeing voluntary Compensation Orders to avoid Court proceedings. They are doing so to avoid Court proceedings and to try and achieve settlements on favourable payment terms.
- The Court found deliberate deceit and concluded that the UK Government was a soft target due to lockdown.
- However, one has to ask why was this particular case was pursued in a Civil Court and not a Criminal Court (cf: Dagistan case above)?
- Also, why the 13-year disqualification period? What does a Director need to do to justify the maximum 15-year ban?
Case 3 – re: Pro Athlete Management Ltd – in Liquidation (2023)
- In this case, the company’s turnover was overstated by the Director in the company’s BBL application.
- The case reached a final hearing in the High Court.
- A 9-year (middle bracket) Director Disqualification was ordered, commencing June 2023, marking this case and its circumstances out as one of the more serious.
- The Director, Paul Regan, successfully applied for Permission (section 17 of the Company Director Disqualification Act) to act as Director, having been disqualified, despite the 9-year ban. We envisage that Permission was given subject to (unknown) conditions. The question is why and on what basis?
- The Court accepted the Director’s contrition at face value and his role in charity work and ‘in doing public good’ through his charity work. The Court found that he had presented a cogent case as to why he needed to be a Director of PPC (his ongoing business) following his disqualification.
- What are the Conditions for this Permission? Conditions are likely to have been ordered as part of granting permission – we don’t yet know what they are.
The wider picture: Civil or Criminal proceedings for BBL fraud?
- What factors go to determine civil or criminal proceedings for BBL fraud from the Insolvency Service?
It depends – Our take is that it depends on the seriousness of the particular transgressions but there is, in our view, clearly a wider set of considerations in play, as the above 3 cases show.
- Can there be parallel civil and criminal investigations into the same conduct and what is the effect of them?
Yes, there often is – Directors need to tread very carefully as a result. Admissions made by a Director in a civil Director Disqualification Investigations (‘DDI’) can (and do) sometimes come back to haunt the Director in a subsequent criminal law investigation.
- Has the bar got lower for Directors to successfully apply to Court on ‘Permission to Act’ applications?
Apparently so. Each case will always turn on its own merits. The quality of the evidence and written representations put to the Court by/on behalf of the applying Director is inevitably a matter of vital importance.
Some of our recent experience – good news for Directors and lessons learnt
Here we look at recent outcomes in BBL cases that we have been instructed in.
- The IS has, in one of our very recent cases, agreed to abandon proposed Director Disqualification proceedings on condition that the Director repaid the £20,000 outstanding on the BBL. This is a great result. Will this be wider implemented by the IS? Time will tell.
- In terms of DDCO applications (which are only a remedy for the IS, once the Director has agreed to give a Director Disqualification Undertaking or has been disqualified by the Court), the IS has shown a willingness to agree to repayment of part or all of the BBL over time, in a period agreed between it and the Director.
- The Regan case (above) shows that in the right circumstances, the Director, who gets disqualified for 9 years (as in that case) can still successfully apply for Permission to Act as a Director in respect of other ongoing limited company businesses despite the ban, albeit subject to conditions.
The key steps for the Director to take in BBL cases, in our experience, are:
- For the Director, to make the strongest possible written representations to the IS, in response to the threat of any Director Disqualification claim or investigation.
- Those written representations should set out all the relevant circumstances and the background to the case. Remember, the IS are strangers to the history of the company. The Director in contrast ‘lived’ that history so share it.
- In DDI, taking those steps may well result in the DDI being abandoned, or may result in a lower period of disqualification being negotiated with the IS by the Director; this can be very important in any proposed application to the Court for Permission to continue to act, by the Director.
- Another key matter is to deal openly and honestly with the IS in relation to a Director’s financial circumstances, when a DDCO is threatened by the IS.
- This can result in favourable compensation application outcomes for the Director.
- In Criminal law BBL cases, it is important to ensure that the Director gets the right advice early on. This can make all the difference in the world to the case outcome.
Some final key points to note in BBL cases
Quite separate from the DDI/Director Disqualification proceedings, it is important to remember that:
- The Liquidator of the company (that took out the BBL) can also seek to pursue recovery of the BBL, alleging, for example, misfeasance against the Director pursuant to section 212 Insolvency Act 1986.
Section 212 (1) states:
‘212 Summary remedy against delinquent directors, liquidators, etc.
- This section applies if in the course of the winding up of a company it appears that a person who—
- is or has been an officer of the company,…
(c) not being a person falling within paragraph (a) or (b), is or has been concerned, or has taken part, in the promotion, formation or management of the company, has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance (our emphasis added) or breach of any fiduciary or other duty in relation to the company.’
Information provided to the IS by or on behalf of the Director, or to the Liquidator may well become available between the two. Directors need to take care to be consistent in what is said.
- Despite the prospect of financial recovery action by the IS (through DDCO applications) or from the Liquidator (through for example, Misfeasance proceedings against the Director), there can be no double recovery. The amount of the BBL can only be reclaimed once.
Talk to our Insolvency Litigation and Director Disqualification specialists if facing investigation for a BBL
In some cases, as shown above, the offence is very clear and the only issue is why sterner punishments were not handed out.
However, as with many of the cases we have been instructed on, we have been able to reduce the Director Disqualification period sought or persuade the IS to drop the DDI. The earlier we are involved, the more we can do to help. Contact us or call us on 0121 200 7040 for a free initial discussion.