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Covid Loans, CBILS Loans & Furlough Funds – Directors be Very Afraid of Investigations Post Liquidation.

2021 and 2022: Trends & New Legislation over Company Dissolution that Directors & Their Advisors Need to Understand About Covid Loans and Funding.

The starting point is to remind the reader that Covid Funding and Furlough Loans were put in place to save the UK economy from disaster. There have been, however, many stories of such loans being taken out fraudulently and/or not being used for what they were intended for. Indeed, it is likely that £Billions have been used in this way. This has led to a rapidly growing number of investigations leading to Director Disqualification, Insolvency Claims and some criminal law prosecutions against Directors.

It is vital however that we all remember that not every Director of every company that took out a Covid Loan or Grant but then fell into liquidation with an unpaid loan, is delinquent.

Every such Director will likely however face investigation by one or more of the Insolvency Service, their Liquidator and others.  That is why we say Directors should be wary of the possible outcomes (Director Disqualification, financial recovery action or even Criminal proceedings).

Now that Directors of failed and dissolved companies will face ever more scrutiny from several agencies in 2022, due to new legislation coming in early next year, taking professional advice as early as possible is vital.  The Director must be prepared to defend their position when challenged or ideally, ahead of liquidation – that is where we can help.

Bounce Back Loans & CBILs Loans

Here at NDP, we are handling many cases where Liquidators and separately, the Insolvency Service, are investigating and pursuing Directors arising out of alleged misuse of Covid funds. It is however vitally important to look at ‘all the circumstances of the particular case’as this testimonial demonstrates.

This article looks at:

  1. The marked increase in the number of company liquidations in Q3 of 2021 and the likely reasons for that. Total company insolvencies in Q3 2021 increased by 17 per cent from Q2 2021 and by 43 per cent from the same quarter in the previous year. See below.
  2. The attempts made by Government to stop (or at least limit) the fallout for the UK economy, of the abuse of billions of pounds of Covid funding (aka Public Funds) by Directors of failed limited companies. Those attempts include:
  • Directions given by their Regulated Professional Bodies (‘RPB’s’) to Licensed Insolvency Practitioners (‘LIP’s’) to flag up, investigate and report potential funding abuse by Directors. LIP’s are subject to mandatory requirement to target and report on such matters.
  • The prohibition imposed on the dissolution of any company with a Bounce Back Loan – see below.
  • The targeting of action against delinquent Directors by Government, to include:
  • Director Disqualification investigations and proceedings by the Insolvency Service.
  • Encouragement to Insolvency Practitioners to take financial recovery action against delinquent Directors.
  • Criminal proceedings in respect of Covid funding fraud.
  • Director Disqualification Compensation proceedings (‘DDCO’).
  1. Our predictions as to where matters will go in 2022 and beyond and what the targeted Director can do to protect himself/herself.

Overview – What is Happening on the Ground Right Now?

Directors are already being disqualified as Directors or receiving extended Bankruptcy Restriction Orders (‘BRO’s’) where they have either:

  • Inappropriately or dishonestly applied for Covid loans and grants; and/or
  • Misused such loans and grants, once received.

 Is that Punishment Enough?

Perhaps not.  Put another way, is a Directorial ban appropriate or proportionate punishment, for a Director fraudulently applying for and/or misusing £50,000 of public funds?  An objective observer might think not in many cases.  What about criminal law offences and prosecution?  We are not so far seeing many criminal proceedings or DDCO’s being regularly employed.  DDCO’s are surely an ideal vehicle to use in such circumstances?

Our Comments

Looked at from the outside, some Directors may consider that a Directorial ban or extended BRO’s is a price that he/she is prepared to pay as the price for the ‘free’ money received.

Practical Problem – The Capacity and Targets of the Insolvency Service

The Insolvency Service is in the front line, to investigate Director misconduct in failed limited company businesses.  Despite the ever-increasing workload of the Insolvency Service, in investigating such Directorial misconduct, we have seen no real evidence of increased Government funding being given to the Insolvency Service, to target such fraud. In the absence of that resource, the fear must be that many delinquent Directors will fly under the radar and ‘get away with it’.

The National Audit Office (‘NAO’) reported on 3rd December 2021:

‘The impact of prioritising (speed of loans) is apparent in the high levels of estimated fraud. Counter fraud activity was implemented too slowly to prevent fraud effectively and the departments focus is now on detection and recovery of fraudulent loans.

The department needs to improve upon its identification, quantification and recovery of fraudulent loans…compared with the scale of its ‘most likely’ estimate of £4.9 billion of fraudulent loans, both the 32m additional budget for counter fraud operations and its targets to recover at least £6m of fraudulent loans from organised crime are inadequate. The department has given low priority to tackling ‘bottom-tier’ fraud…’

Liquidation numbers in Q3 2021 are well up – Why? Could Directors be Liquidating to Avoid repaying Bunce Back Loans

On 29 October 2021, the UK Insolvency Service published its insolvency statistics for Q3 2021.  Perhaps worryingly, the number of company insolvencies was 17% higher than in Q2 2021 and 43% higher than in Q3 2020. This was driven by an increase in Creditors Voluntary Liquidations (‘CVL’), to the highest quarterly level for 12 years. That is remarkable. The inescapable conclusion is that one driver of that increase, is a willingness by Directors to liquidate, to avoid repaying Bounce Bank Loans.

While CVL numbers were higher in Q3 2021 than pre-pandemic levels, numbers for other insolvency procedures, such as compulsory liquidations and administrations, remained at historic lows.   This was surely due in part to the unprecedented government fiscal measures put in place to support businesses and the temporary restrictions on the use of Statutory Demands and Winding-Up Petitions.

Dissolution of Companies and Bounce Back Loans – Will Proposed New Legislation Limit the Scope for Fraud by Fraudulent Directors?

In the first three months of 2021, almost 40,000 companies were struck off the Companies House register, a staggering increase of 743% on the same period in 2020.

Speculation that these figures related to avoidance of coronavirus-related loan repayments led the Department for Business, Energy and Industrial Strategy (‘DBEIS’) to take the unusual step, in March 2021, of making a blanket objection to any application for dissolution by any company with an unpaid Bounce Back Loan.

It is believed that this may have prevented the dissolution of almost 51,000 companies, with unpaid loans totalling over £1.7 billion.

What is Dissolution?

The Companies Act 2006, allows the Directors of a company to apply for its voluntary strike-off and dissolution. The procedure offers a relatively straightforward and cost-effective way to close down a non-trading company.

The procedure provides for a distinct lack of scrutiny, however. The potential for abuse by rogue Directors is substantial. Directors of dissolved companies until 15th December 2021 fell outside the remit of the Company Directors Disqualification Act 1986 (‘CDDA’).

Thus, use of the voluntary strike-off process previously enabled Directors to avoid:

  • Investigation by the Insolvency Service.
  • The risk of Director Disqualification.
  • The risk of being made personally liable for the company’s debts, by action from a Liquidator (or otherwise).

Stop Press – So What is the Legislative Change?

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill received Royal Assent on 15 December 2021. Most of its provisions will come into force on 15 February 2022.  It extends the provisions of the CDDA to Directors of dissolved companies, enabling the Insolvency Service to investigate their conduct and apply for their disqualification.

Specifically, the following changes now apply:

  • The Insolvency Service now has power to investigate the conduct of a Director of a company that was dissolved without becoming insolvent. If their conduct makes them unfit to be concerned in the management of a company, the Court has an obligation to make a Disqualification Order.
  • The above power can be exercised up to 3 years after dissolution.
  • A DDCO can also be sought where a former Director of a dissolved company has caused loss to creditors.
  • The conduct that the Insolvency Service can investigate and consider includes conduct in companies dissolved prior to commencement and which occurred in companies not dissolved at that time.

Our Comments

However, is this just damage limitation?  Has this horse already bolted?  If the new provision forces Directors down the road of placing a company into a liquidation process, will there be the will and/or resource in the Insolvency Service to identify and action discovered Directorial misconduct?   Even if there is, will the ‘punishment’ fit the crime?  (Last time we looked, obtaining up to £50,000 of Public Funds by deception and/or misusing £50,000 of public money fell fairly and squarely within definitions of criminal law conduct in any other context).

What Lies Ahead?

The most recent UK Budget announcement included some continued financial support for certain businesses, including a business rates discount for the hospitality, retail and leisure sections for 2022 to 2023.

Winding up and Bankruptcy Proceedings

Until September 2021, creditors have not been at liberty to present Winding-Up proceedings to recover debt.

From 30 September 2021, however, most government measures have either ended or been replaced by tapering measures and Statutory Demands and Winding-Up Petitions can now be presented (subject to certain restrictions to support small business and commercial tenants).

Our Predictions

  1. HMRC and fed-up trade creditors will take steps to present Bankruptcy and Winding-Up Petitions on an accelerated basis in 2022.

Increased Pressure on Business in 2022

  1. We predict that as businesses face up to these changes and challenges, to include high energy costs, supply chain issues, staff shortages, continued disruption due to Omicron and the repayment of Covid loans, we will see company insolvencies (particularly liquidations) continue to rise in the UK in the months ahead, especially since Bounce Bank Loans have now become repayable and the dissolution route becomes unavailable.
  2. Directors of failed and dissolved companies will face ever more scrutiny from several agencies in 2022. Early advice for the Director, as ever is the key. It is surely only a matter of time before criminal law steps are taken against an increasing numbers of delinquent Directors.

 How can we help?

As ever, the earlier we get to advise the Director, the greater the opportunity to protect or mitigate the position of the Director.

The well-advised Director will get specialist advice before going down the liquidation route.

Contact us or call us on 0121 200 7040 for a FREE initial conversation.

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