BAFO applications are being used to attack directors of companies that are not necessarily in formal insolvency, even where a Bounce Back Loan continues to be repaid
The fraudulent taking out and/or misuse of Bounce Back Loans (‘BBL’) by Directors and the use by the Insolvency Service (‘IS’) of Director Disqualification investigations in such circumstances has been widely reported. In some cases Criminal proceedings and custodial sentences have been the result. In this article we look at how BAFO’s are now being used in the fight against BBL abuses. The key areas this article looks at are:
- THE NATIONAL INVESTIGATION SERVICE (‘NATIS’).
- CRIMINAL LAW CONSEQUENCES.
(Article 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.)
The use of BAFO’s
A new form of personal attack on the Director is in town, the BAFO. The differences here are that BAFO’s are being used to attack Directors of limited companies that are not necessarily in a formal insolvency procedure (i.e., the BAFO application can be made where the company is live) and are made even where the BBL continues to be repaid.
The BAFO application is made to the Magistrates Court and such applications perhaps inevitably involve allegations of serious Criminal law misconduct against the targeted Director and/or limited companies.
The BAFO attack involves, arising out of the taking by the company of a BBL:
- Applications for BAFO’s may be made against personal and business bank accounts of Directors and others.
- Allegations of Criminal law conduct against the Director, to include Fraud and Money Laundering allegations.
- Targeted raids on premises by the NATIS Investigator (on which see below) to gather evidence (this subject merits a stand-alone article).
- The very real potential for financial Confiscation proceedings against the Director and his assets.
Director Disqualification Investigations
Apart from a small number of Criminal prosecutions arising out of BBL’s, to date much of the IS focus has been on investigating and applying for the disqualification of Directors, pursuant to section 6 of the Company Directors Disqualification Act 1986, where it is believed by the IS that there has been Unfit Conduct by the Director in relation to the application for and/or subsequent misuse of BBL‘s.
Such disqualification investigations by the IS, in relation to alleged BBL misconduct, are often accompanied by the threat of an application for a Director Disqualification Compensation Order (‘DDCO’) seeking a financial remedy against the Director, often equivalent to the amount of the BBL that ought not to have been taken or the amount of the BBL deemed to have been misapplied.
That Unfit Conduct has in the main taken two forms of allegation by the IS against the Director, being:
- Misapplication for the BBL – usually involving an allegation that the applying Director over-stated company turnover, to enable the company to receive a greater sum than that to which the company was properly entitled, under the BBL Scheme.
- Misuse of BBL funds once received by the company, often involving payments made to the Director(s) or third parties who have little or no connection with the company.
NATIS: All change. Enter stage right NATIS. What is NATIS and what are its objectives?
NATIS describes itself as a government funded collaboration between the Government and the Police to investigate serious and organised crime affecting the public purse and provide mutual aid and support to public bodies facing serious crime issues. NATIS says that it has a significant amount of primacy for investigating suspected offences perpetrated against the Government BBL Scheme.
We can thus perhaps expect to hear a lot from NATIS, in the coming weeks and months.
We have in recent days been instructed in a BAFO case where the Director:
- On 14 December 2022, was hand-delivered a letter in relation to a NATIS led Proceeds of Crime Act (‘POCA’) investigation, where a BAFO was sought, arising out of alleged misuse of BBL funds.
- Was notified in the letter, of a 15 December 2022 hearing in the Southend-on-Sea Magistrates Court, where NATIS sought Orders involving BAFO’s against identified bank accounts and identified monies in those accounts, to last for a period of six months pending further investigation by NATIS. It is thus (to all intents and purposes) a ‘without notice’ application to Court (like most Freezing Order applications).
To get to this point, NATIS had clearly expended a lot of time, cost, and effort. It will surely not have done so lightly.
The stated basis of the NATIS APPLICATION TO THE Magistrates Court…
…Was that there were reasonable grounds to suspect that the credit balance held in the accounts were obtained by unlawful conduct, namely:
- The fraudulent obtaining, directly or indirectly, of a Government backed BBL in contravention of the eligibility requirements, by false representation – contrary to section 2 of the Fraud Act 2006; and
- Money Laundering offences contrary to sections 327, 328 and 329 of the POCA.
The BAFO applications were made under section 303Z3 of the POCA, that permits the freezing of an account if there exist reasonable grounds for suspecting the money in the account is intended by any person for use in unlawful conduct or is recoverable property.
Heavy and serious stuff indeed.
Our preliminary thoughts
- The BAFO application, although made to a Magistrates Court, is a Civil Law (not Criminal) remedy and thus Public Funding is not available (according to the NATIS letter to the client) to oppose or deal with such BAFO applications. Use of frozen funds may (depending on the facts of the particular case) be available if the targeted Director/targeted company has no other funds available to it, to challenge the BAFO. That however is by no means certain.
- The purpose of the BAFO is to give NATIS time to investigate further the circumstances in which the BBL was applied for and used, thus preserving funds in those bank accounts in the meantime. Funds can be frozen for up to 2 years.
- The underlying grounds for the BAFO application on these facts, (suspicions of Fraud and Money Laundering) clearly are allegations of Criminal law conduct that must be taken seriously by the Director, involving as they do Criminal Law allegations that carry for the Director (amongst other remedies), the very real prospect of (for example) custodial sentences on conviction in the Criminal Courts.
- That further NATIS investigation, on the facts of this case will (according to information supplied by NATIS to the Court) involve:
- Requests of HMRC for personal and business records.
- Obtaining personal bank statements.
- Obtaining working files from Accountants. How should the Accountant react to such a request? Again, this justifies a separate stand-alone article.
Raids on premises
Consideration of obtaining Warrants by/on behalf of NATIS, to carry out raids, to search personal and business premises for evidence, usually in conjunction with and operationally supported by the Police.
The NATIS investigation is costly and time consuming and suggests a real determination to pursue cases to a Criminal law conclusion.
How should the investigated Director react and respond?
5. The Director/the targeted company should obtain specialist legal advice at the earliest moment. Establishing contact with NATIS and its Accredited Financial Investigator via your experienced Solicitor will be a priority in most cases once the Director and his Solicitor have discussed in detail the background to matters. At that point, a strategy can be decided upon by the targeted Director with his Legal Team as to how best to proceed.
Crumb of comfort
Some comfort can perhaps be taken from the NATIS undertaking to the Magistrates Court, that if it is provided with what is describes as ‘irrefutable evidence’ that the account funds do not comprise ‘recoverable property’ or ‘money intended for use in Unlawful Conduct’ then the BAFO will be discharged. Therein lies but one of a number of objectives for the Director.
6. The targeted Director should not ignore the NATIS investigation. Get advice immediately to try and stop the investigation running. The amount of money frozen may not be that great, but the underlying Criminal law conduct complained of and the consequences of it, if proved surely requires the Director to take advice and protect his/her position at the earliest point. The BAFO is likely to be the beginning rather than the end of the problem for the Director.
The amount involved in the case where we are instructed is not great. About £60,000 of BBL funds said to be taken/used improperly. The financial cost of the NATIS investigation must (even now) be disproportionately significant to that figure. That suggests an intention on the part of NATIS to take the investigations all the way.
- Obvious questions are why this case? Is this case the tip of an iceberg? Will we see many more such NATIS investigations arising out of BBL’s? We think so.
What is clear is that the stakes have been raised and Directors need to tread ever more carefully.
We are well placed to help
David Hanman and Neil Davies head up our Team of ten, with over 140 years of combined Insolvency, Litigation and Business Crime experience. There will not be much in Insolvency, Fraud and Monitoring Laundering allegations that we have not seen and dealt with before.