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Directors beware: Covid fraud – the attacks will keep on coming… ‘Is the party over for fraudulent directors?’

The National Audit Office in its December 2021 report concluded that £4.3 billion had already been lost to Covid-19 fraud of the £47 billion of public money dished out in Bounce Back Loans.

This article by Neil Davies* updates the moving feast that is the ongoing and systematic challenges faced by Directors in dealing with continuing and renewed attacks on them and includes our further predictions for 2022 and beyond.  Click here to read Neil’s first article. (*Neil is a member of the Advisory Board to the leading text on Director Disqualification law and practice,Mithani on Directors’ Disqualification, the leading publication on Director Disqualification Law and Practice, recognising Neil’s expertise and experience in this field of work.)

GOVERNMENT INACTION ON COVID FRAUD – IS THE PARTY FOR FRAUDULENT DIRECTORS OVER?

The number and types of attacks on Directors and the challenges they face are very likely to increase in the immediate future, in response (for example) to criticism of the Government from within the Government (Lord Agnew as the counter – fraud minister very publicly resigning) and also because of external criticism from (amongst others) the National Audit Office (‘NAO’) as the spending watchdog, who pulled no punches in setting out a host of Government failures in tackling Covid fraud.

The NAO in December 2021 reported that Government had given no/low priority to tackling so called bottom tier fraud, including those Bounce Back Loans (‘BBL’s’) where borrowers misstated turnover by less than 25%. The NAO concluded that failure was attributable to resource constraints. The NAO report expects there to be focus on this particular fraud tier, but there appears to be limited commercial incentive for the Government to do so.  If this happens, it will spawn a whole new raft of investigations into BBL fraud.

There already are, however, a growing number of investigations into Directors who have been unable to pay their Covid loans for entirely legitimate reasons, and that is where we come in.

THE IMMEDIATE FUTURE

Whether or not in a deliberate and genuine attempt to recover wrongly obtained and/or wrongly used public funds from Directors (personally as compared to a window dressing exercise), it is perhaps inevitable in light of that ongoing criticism that Government is saying that it will bolster efforts and provide additional resource to recover monies improperly obtained by Directors. Time will tell.

FEEDING FRENZY

Despite what the NAO say is the inconsistent and lamentable approach of the State to date, in trying to recover fraudulently obtained funds, there are in fact very many recovery claims that are being pursued against Directors right now.

WHAT ARE THE ATTACKS WE ARE SEEING?

We represent very many Directors faced with claims against them from one or more of:

  • The Insolvency Service, commencing and pursuing Director Disqualification Investigations (‘DDI’) and on the back of such investigations,  pursuing Director Disqualification Compensation Orders (‘DDCO’) that seek financial recovery from the Director.  DDCO’s are being specifically targeted at DDI cases where BBL fraud is alleged (but not, it seems, at every such case).
  • Criminal law Investigators and Criminal proceedings by the Insolvency Service and other Agencies.

WHY IS THIS HAPPENING? SOME OBVIOUS REASONS

  • The NAO in its December 2021 report concluded that £4.3 billion had already been lost to Covid fraud of the £47 billion of public money dished out in BBL’s in 2020 and 2021. Government needs to be seen to act. BBL’s were launched on 4 May 2020 offering loans of up to £50,000 or a maximum of 25% of annual turnover.
  • An estimated 1,000 BBL’s were given out to companies that were not even trading when BBL’s were applied for by Directors, according to the NAO (that number feels low to us).  Due diligence on borrowers was virtually non-existent (for sound commercial reasons) at the time.
  • Lord Agnew publicly warning that £17 billion of Covid loans may never be repaid (due to fraud and credit failure). 
  • Heavily publicised cases of misuse of public funds to include a case where a Manchester Judge was aghast at BBL funding of £145,000 having been given to gangsters and a separate case of BBL funds having been used to buy gold watches and pay off gambling debts.
  • Wider Covid related public fraud, to include Personal Protective Equipment (PPE) fraud and Furlough fraud, as heavily reported in the National Media.

PRACTICAL RESTRICTIONS ON SUCCESSFUL RECOVERY ACTION

It remains the case that there appears to be a lack of financial resource and even perhaps political will to pursue recovery of money, perhaps attributable to lack of boots on the ground.  Our already overcrowded prisons may also be a factor. The public policy need, to recover such funds and punish offenders (on the one hand) and the questionable use of scant resources needed to do so, appears to be a finely balanced judgement call.

WHAT ARE WE SEEING ON THE GROUND RIGHT NOW?

  • Worryingly, we are seeing an increasing number of Directors who quite properly took BBL/Coronavirus Business Interruption Loan Scheme monies (‘CBILS’), but who then suffered company failure, being wrongly Targeted for Director Disqualification /financial recovery/punitive action of the types mentioned above. 
  • What we perceive to be an increasing reluctance and unwillingness on the part of some (emphasis added) Investigators (criminal and civil ) to approach such cases with an open mind and the required willingness (not to mention statutory obligation) to look at and take into account all the circumstances of the case.  That surely requires the Investigator to at least listen to what the Directors has to say.

EXAMPLE

On 25 February 2022, a Director client (about to instruct us in his DDI) received an email from the Insolvency Service, in response to his request to the Insolvency Service for time to instruct us and then time to respond to the Insolvency Service.

 The email response from the Insolvency Service told him, in terms, that the Investigator had made his mind up despite his not yet having received the Director’s explanation.

COMMENT

 We consider that response to be entirely wrong.   The Director may well have something valuable to say on the facts of any case.  Even on what we know now, there is a perfectly good answer to the allegation of BBL fraud on the facts of that particular case.

WHAT ELSE ARE WE SEEING?

  • An increasing number of criminal law investigations into BBL, CBILS, Furlough and PPE fraud.  We think that in some instances the wrong cases and individuals are being targeted, in a number of cases that we are seeing.  That may be a quality of case vetting issue or more worryingly, a lack of available resource to properly look at each case.   A scattergun approach from Investigators would be quite wrong.
  • More DDCO Applications, seeking financial recovery from Directors by the Insolvency Service.  We have seen 5 such cases in the last 24 hours.  This it seems is a trend that will continue.
  • An avalanche of Director Disqualification Investigations arising out of the taking of BBL’s.
  • As a new development, we are aware of DDI’s against Directors arising out of alleged CBILS fraud and separately, alleged PPE fraud.
  • Blatant cases of Covid funding fraud not (yet) receiving appropriate attention from the Insolvency Service and other Agencies.

EXAMPLE

We were invited in late December 2021 to advise a Director who took no less than 20 BBL’s for 20 dormant companies and then used the money received (£50,000 per time) to buy property in the names of his family members, before liquidating every single one of those companies (one Liquidator has 12 of the voluntary liquidations).

The Director clearly did not like our views, because he did not instruct us. We are not aware of any criminal investigation into the conduct of that Director. Instead, the Insolvency Service are looking to disqualify that individual from being a Director.

So what? Director Disqualification might for that Director be an acceptable price to pay for wrongly receiving 1.2m, some might conclude.  Criminal investigation and proceedings may of course follow.

CAN THE DIRECTOR AVOID ATTACK BY REPAYING THE FUNDS?

Necessity as we know is the mother of invention.  There is anecdotal evidence to suggest that the lack of investigative and financial resource to investigate and prosecute Covid fraud means that even in the worst fraud cases, there is the very real opportunity for the Director to avoid certain types of Director attack, by agreement to repay some/all the improperly applied for/misused (once received) funds.

That appears particularly so, in claims by Liquidators and even in criminal investigation cases. Like it or like it not, the fact is that repayment seems to be an available option to the Director, in some cases, to avoid further action.

THE FUTURE: SOME MORE PREDICTIONS

Insolvency Service statistics for the calendar year 2021 show a year-on-year increase in company insolvency cases, particularly an increase in Creditors Voluntary Liquidations (‘CVL’s’). The highest annual number of CVL’s since 2009 , occurred in 2021.

  • That will surely translate into more DDI’s, more DDCO investigations, more Liquidator claims and more  criminal law investigations into suspected directorial misconduct.
  • We anticipate seeing more DDCO claims being brought, in parallel with DDI’s. Worth noting that such DDCO claims cannot be brought other than as being parasitic on  DDI claims.  DDCO claims are not ‘stand-alone’ claims.

DISSOLVED COMPANIES

  • We predict more DDI’s arising out of Covid fraud, with different types of unfit conduct being alleged against Directors, to include new types of Unfit Conduct allegations arising of:

Furlough funds fraud

CBILS fraud

PPE Fraud

  • We predict more Liquidator financial claims against Directors arising out of Covid fraud, alleging Misfeasance (i.e. misuse of company money or property) and breach of statutory duty claims.
  • We predict more Criminal law investigations.

WHAT SHOULD THE WELL ADVISED DIRECTOR DO? 

  • Obtain advice from specialist insolvency lawyers as early as possible.  There are many options available to the Director, whatever stage the investigation or proceedings may be at.
  • Be aware of all the options that are available to the Director.  Some of them may not be obvious.
  • Identify the Director’s objectives/outcomes and develop a plan with your Insolvency Lawyer to achieve them.
  • Choice of Licensed Insolvency Practitioner (‘LIP’).  If liquidation for the company that has received Covid money becomes inevitable, then in the pre-liquidation period, choose your LIP carefully.  A wrong choice can prove very costly indeed.  We have strong links with the LIP community.  We have directed a number of our clients and contacts to LIP’s who are prepared to listen to the issues on a case by case basis and then work with the Director to mutual best advantage.  No LIP will ‘go soft’ on Covid fraud but there are ways and means of resolving the issues, without unnecessary cost and drama.

THE FUTURE – TALK TO US IF THREATENED WITH DIRECTOR DISQUALIFICATION

We predict that more legitimate Directors will be caught up in the Covid feeding frenzy. That is where we come in.  The focus of the Director, as ever, must be on explaining his/her position to the Investigator in the most advantageous way.

Even where a Director comes under attack having wrongly taken Covid funds, that Director still has options to limit the damage to his/her position.

We can help… . Contact us for a free of charge, confidential and no obligation discussion.

Neil Davies, Solicitor and NDP Director.

March 2022

Neil is an Advisory Editor to the leading text on Director Disqualification law and practice, ‘Mithani: Directors’ Disqualification.’

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