HMRC Applications to Court for Bank Account Freezing Orders for Fraudulent use of Coronavirus job retention scheme monies
We speculated recently in a blog about the various ways in which Directors and their businesses will come under attack, post liquidation, by for example:
- Misfeasance claims (section 212 of the Insolvency Act 1986 (‘the Act’)) from Liquidators;
- Director Disqualification Investigation (‘DDI’) from the Insolvency Service; and
- Director Disqualification Compensation Proceedings (‘DDCP’) from the Insolvency Service (we have one such case on the books already).
These all arise because of insolvency, and specifically for the purposes of this article, if the business involved has received a Coronavirus related loan, which remains outstanding. However, directors of solvent and trading companies are also vulnerable to attack for ‘fraudulent use of such loans’, and that includes via the Job Retention Scheme, CBILs and Bounce Backl Loans.
Neil Davies – insolvency solicitor and director disqualification specialist – looks at the ‘how and why’ in this article and comments on how such attacks might be opposed and dealt with. But first a reminder of the obligation of Insolvency Practitioners to report on Covid-19 related fraud.
Obligation on Insolvency Practitioners to Report Covid-19 Related Fraud
The Insolvency Service has stated:
‘In our regular bulletin to Insolvency Practitioners, we have reminded them of their duty to report to us, and how to do so, any suspected fraudulent activity they may identify in their Director Conduct Reports on insolvent companies, which includes those involving Covid-19 government financial support schemes.’
Those support schemes include:
- Coronavirus Business Interruption Loan Scheme (‘CBILS’).
- Coronavirus Large Business Interruption and Bounce Back Loan Scheme (‘CBLS’).
What, However, of Solvent and Trading Entities? Where Might That Attack on Directors Come From? What Might it Look Like?
Neil takes up the story:
“Look no further than the Proceeds Of Crime Act 2002 (‘POCA’).
I have on my desk today an Application against our company clients from HMRC seeking a Bank Account Freezing Order against various company bank accounts, holding approximately £1m in funds.
Without access to those funds, the companies will struggle to continue to trade.
The HMRC Application to the Magistrates Court seeks an Order under section 303Z of the POCA which states:
‘303Z Application for account freezing order
- This section applies if an enforcement officer has reasonable grounds for suspecting that money held in an account maintained with a bank or building society:
- is recoverable property, or
- is intended by any person for use in unlawful conduct.
- Where this section applies (but subject to section 303Z2) the enforcement officer may apply to the relevant court for an account freezing order in relation to the account in which the money is held.
- For the purposes of this Chapter —
- an account freezing order is an order that, subject to any exclusions (see section 303Z5), prohibits each person by or for whom the account to which the order applies is operated from making withdrawals or payments from the account;”
The Basis of the HMRC Claim
“HMRC claims to have reasonable grounds to suspect that the bank accounts in question have been used to receive fraudulent coronavirus job retention scheme monies and separately improper VAT credits.
That suspicion caused HMRC to conclude that the funds held in the accounts are ‘recoverable property’ or ‘are intended for use in unlawful conduct’.”
“On the basis of the (less than impressive) written HMRC evidence filed and served in support of the Application, HMRC have concluded that the sum of circa £1m held in the bank accounts is ‘recoverable property’.”
The Way Forward
“Our Senior Solicitor, David Hanman, leads our Regulatory Law Team. He has dealt with a number of these Applications in the recent past, with some success. He leads the Defence to this claim.”
Applications on Notice and Without Notice
“On the facts of this case, the Application was served by post on the target companies by HMRC on Thursday 03 December 2020 with a hearing date of Friday 11 December 2002. Time to get the skates on! Counsel was instructed by us to appear before the lay Magistrates to oppose the Application.
Quite often, such POCA Applications are however made without notice to the targeted Defendant. The first the target knows is when the Bank Account Freezing Order made is served. At that point, the target needs to consider Application to Court, to challenge the relief granted, on an urgent basis.
The burden of proof to justify the bringing and pursuit of the claim is fairly and squarely on HMRC. This will be an interesting one, on the facts of this case.”
Opposing and Dealing with Such Claims
- Funding Legal Defence Costs
“Much as in Civil Freezing Order Proceedings, (carried on before the High Court), the targeted Defendant can invite the Magistrates Court to order that the funds under attack be made available to fund legal expenses, if it can be demonstrated the target has no other funds to look to.”
- Evidence Gathering
“To successfully oppose the HMRC application on the facts of this case, the following steps need to be urgently undertaken to rebut and undermine the HMRC case:
- Witness Statements with supporting documents need to be signed off by the Directors of the companies.
- Witness Statements with supporting documents need to be signed off by the company Accountants and other third parties.”
- Recovery of Legal Costs
“If HMRC ultimately fails in its Application, then the statutory regime provides for HMRC to be liable in an appropriate case to pay the costs of the target companies.”
CONCLUSION – Act Quickly if Threatened with a POCA Application to reduce the prospect of director disqualification and misfeasance claims
The POCA Application is a serious and damaging weapon in the HMRC armoury, especially right now with the extremely difficult situation caused by Covid-19. Our experience shows that such applications need to be investigated and challenged quickly to head off the possibility of director disqualification investigations and compensation proceedings and misfeasance claims.
If you are threatened with a POCA for alleged fraudulent use of Coronavirus related loans, the sooner you contact us or call us on 0121 200 7040 for an initial free discussion, the more we can do to help.