On 12 May 2021 the UK Government published its latest summary  of Coronavirus support payments made throughout the pandemic. Taking business loans as a focus, a total of £76.31 billion had been disseminated to UK businesses as of 21 March 2021.

As these loan schemes were rolled out expeditiously, there was little time to create a watertight approval criterion and even less time to perform in-depth due diligence on each applicant. Consequently, the prevalence of fraudulent loans or loans drawn with little prospect of repayment have been estimated to be significant. Specifically, the National Audit Office has estimated that the percentage of unrecoverable loans from the Bounce Back Loans Scheme (as a result of default, lack of funds or fraud) would likely be between 30% and 75%.

How will the Insolvency Service’s new powers prevent misuse of the dissolution process as a way of fraudulently avoiding repayment of Bounce Back Loans?

Usually, when a company enters a formal insolvency process, such as administration or liquidation, an insolvency practitioner is appointed principally to perform a forensic review of the cause of the company’s distress, to recover assets to enable a distribution to creditors and to investigate any dissipation of any company assets.

In circumstances of insolvency, company directors cease to owe a primary duty to the shareholders of the company - who seek to benefit from company profit - and instead owe a duty to the creditors of the company - who face bearing the financial burden of being unable to recover debts owed to them by the company.

It is helpful here to take an example. A director successfully applied for a Bounce Back Loan and received £50,000. The director withdrew £50,000 into his personal bank account with no intention of repaying this to the company. The director ceases to trade the company and there are minimal creditors other than the sum due under the Bounce Back Loan.

In the absence of creditor pressure but with the knowledge and foresight to detect that insolvency is a not so distant prospect, the director will attempt to dissolve the company to prevent any inquisition by an insolvency practitioner revealing suspicious transactions with his personal bank account.

A company can be dissolved when it hasn’t traded or changed its name for three months, is not under threat of liquidation and is not currently subject to a Company Voluntary Arrangement*. Once the application is made to have the company struck off the register of companies and the relevant notice is given to members, directors, creditors and employees the application to strike off is advertised in the London Gazette and after two months is struck off the register. Alternatively, not filing annual accounts with the Registrar of Companies will lead to a notice that the company will be struck off compulsorily if the accounts are not filed within 3 months and if no creditors or other entitled parties object.

Strike off provides an option for a director to attempt to avoid repaying a Bounce Back Loan and to further prevent an insolvency practitioner from investigating the company’s affairs. In response to this ‘loophole’, the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill enhances the Insolvency Service’s powers to include the ability to investigate and hand down appropriate sanctions to directors of dissolved companies.

The current powers cover live and insolvent companies and this escalation should be viewed as a declaration from the Business Secretary, Kwasi Kwarteng, that defrauding the public purse by attempting to evade repaying Bounce Back Loans via abuse of the dissolution process will not stand.

Speaking about the new measures, Mr Kwarteng said: “Extending powers to investigate directors of dissolved companies means those who have previously been able to avoid their responsibilities will be held to account”.

The sanctions available to the Insolvency Service are disqualifications from directorship for up to 15 years as well as civil and criminal proceedings.

*Section 1003 (2) Companies Act 2006

What is the key takeaway for businesses?

If you are the director of a company and are concerned about your ability to repay a Bounce Back Loan seeking professional advice should be your priority. 

Written by Nicola Whittle, Restructuring Partner, Brabners and Adam Stanley, Trainee Solicitor, Brabners.  For more information visit Brabners’ website.

If you are based in Greater Manchester or Lancashire, our Access to Finance team can guide you through the challenges presented by COVID-19, offering bespoke one-to-one support to develop business plans and financial forecasts. The team can also connect you to our Restructuring and Insolvency partners for guidance.

Get in touch on: 0161 237 4128 or email us at: BGH@growthco.uk