Commercial Update 72: Are the Government Doing Anything About Fraud and Bounce Back Loans?

You all may be aware of a new act of parliament that came into law on 15 December 2021, being the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 (the Act).

The background to the Act was a (somewhat belated) response to the various business support loan schemes implemented during the pandemic with a particular emphasis on the bounce back loan scheme. You may remember that it:

  • Offered loans of up to £50,000;
  • Initially, it only required directors to answer a short questionnaire and self-certify turnover for their businesses;
  • The applicant could then claim up to £50,000 for business use.

As we all now know, an estimated £4.9bn of the £47bn invested in business support loans during the life of the pandemic is thought to have been lost to fraud and up to £17bn may never be repaid. You may also remember that Conservative minister for counter-fraud, Lord Agnew, resigned from the government over losses from the schemes due to fraud and basic errors, including a lack of basic checks and verification of claims.

The Act was designed to be the response where directors had fraudulently claimed sums to which they are not entitled.

As you may have realised, at the end of the life of a company, if it enters into a formal insolvency process, a licensed insolvency practitioner (IP) will then investigate all potential claims against directors and third parties and look to trace and reclaim assets which have been diverted away from the company.

However, there is no equivalent procedure where a company is simply dissolved by the company directors, so a director who wished to evade liability could apply to strike off the company through a simple application to Companies House to avoid any investigation.

Although, directors are required to notify creditors of the proposed application to provide them with an opportunity to object and pursue any unpaid debts, clearly applications for strike off have been made without notifying creditors (such as banks or, indeed, HM Treasury) of any outstanding loans, particularly if the intention was to avoid paying them!

The Act has been designed to allow an investigation of directors’ behaviour where the company has been dissolved and it allows disqualification proceedings to be brought against directors of dissolved companies and potentially also compensation orders to be made against them.

However, it does rely mainly upon disgruntled creditors or other third parties reporting to the Secretary of State regarding misconduct by directors and even if a disqualification order is made, there is no redress specifically for the individual creditor affected, with compensation orders generally being made in favour of creditors as a whole.

For a deprived creditor of a dissolved company then, the better option may be to apply to restore the company.

This would then allow an IP to be appointed by the creditor to act as liquidator thoroughly to investigate any misconduct or fraud on the part of the directors – this could lead to claims such as breach of duty, transactions defrauding creditors, and undervalue / preferential payments.

The downside of this though is, as always, cost – an IP will only be prepared to take the appointment as liquidator with funding and where recovery is uncertain, this is a significant cost, and risk, for creditors, which many will be unable (or unwilling) to bear.

Disqualification proceedings relating to fraudulently claimed loans are certainly on the increase, but this is of little comfort to creditors. The reality is that many, if not all, of the costs will be borne by the public purse under the Government guarantees supporting these loans.

Regards to all,