The Insolvency Service recently published its annual report, covering the criminal and civil work undertaken to tackle financial wrongdoing. During 2023/2043, the Insolvency Service completed 87 criminal prosecutions, undertook 139 live company investigations, and disqualified 1,222 directors for misconduct.
Focusing on Covid loan abuse, the Insolvency Service's investigations led to 831 disqualification outcomes, 93 bankruptcy restrictions and 22 criminal prosecutions for offences in this area, with almost £3 million recovered for the public purse.
What was the Covid support scheme?
During the COVID-19 pandemic, the government launched the Covid Bounce Back Loan Scheme to support small to medium-sized businesses. The scheme entitled businesses to a single loan of up to 25% of their turnover, with a maximum borrowing of £50,000.
To be eligible, the company would need to be UK-based, established before 1 March 2020, not in financial difficulty on 31 December 2019, and adversely impacted by the pandemic.
How was the scheme misused?
Whether intentional or not, many directors have been found to have misused the scheme.
While the BBL application process and the lack of checks can be criticised, recent statistics clearly show that the Insolvency Service has identified a clear and widespread misuse of the scheme.
The scheme's most common abuse was fraudulent applications, particularly those regarding turnover requirements.
Many directors have falsified their annual turnover amount to take advantage of the loan. In August 2023, a former director was sentenced to 8 months imprisonment for falsifying his turnover so that he could receive £20,000 from the scheme.
It is not surprising that the scheme was rife for manipulation. The tick box self-certifying application required directors to confirm two simple criteria:
- They were based in the UK and were affected by COVID-19.
- They were in business as of March 2020 and not insolvent as of 1 December 2019.
However, it is not just errant directors who deliberately sought to misuse the schemes that the Insolvency Service is pursuing. We have seen a sharp increase in the number of directors facing financial claims, and director disqualification investigations as a result of misunderstanding the application criteria.
Another method that was seen as a common misuse of the scheme was the inappropriate use of funds. The scheme's funds were to be used for the company and to provide it with an economic benefit to help it operate and survive the pandemic.
However, many directors were seen to not use the funds for the benefit of the company; rather, they were used for personal gain, such as salary, purchase of personal assets, or transfer to personal bank accounts.
In 2022, investigations held in Newport for a car breakdown recovery service which had entered liquidation found that the director had applied and obtained a £50,000 loan from the scheme. Whilst he used some of the funds to purchase a tow truck for the benefit of the company, the remaining amount was used to fund his personal and general lifestyle expenses.
This director has since been disqualified due to not using the funds for the benefit of the business. Whilst some cases showed the director's clear intention of misusing the funds, there are others where confusion led to misuse of funds.
The most recent published statistics from the Insolvency Service also highlight an increase in the severity of the conduct, with disqualifications over 10 years increasing from 6% in 2021 to 47.1% in 2023/2024.
This year the average length of a disqualification ban increased to over 8.6 years from 7.4 years.
Whilst not as common as the previous two, defaulting on payments has also come to light in recent years, with some directors taking the loan with no intention of paying it back. This was typically seen in the form of directors applying for the scheme, and once they received the funds, they dissolved the company. The director of BI&F Ltd was found guilty of the same and has been banned for a total of 16 years.
As a result of misuse of the scheme, it is estimated that the losses suffered from fraud and errors in the scheme amount to £1.1 Billion.
Consequences of misuse
As mentioned in the above cases, misusing the scheme and its funds can lead to a range of penalties, including fines, disqualification, imprisonment, and bankruptcy, often with legal action being taken against directors.
Recently, it has become clear that the Insolvency Service has been issuing more Compensation Orders against the directors for full repayment of amounts unlawfully claimed, along with statutory interest. This action has resulted in 90 directors receiving a Compensation Order or entering into a compensation undertaking to pay a combined total of £2,833,937.
The consequences are severe and can have a long-lasting effect on the individual. During the past year, the Insolvency Service has continued focusing its efforts on investigating misconduct in relation to the COVID-19 financial support scheme, and it does not look like efforts will be slowing anytime soon, with additional funding having been received for 2024.
