Directors, Dissolution, Disqualification

Bounce back loans (“BBLs”) provided essential, temporary funding to businesses to keep them afloat during the pandemic. These loans were capped at £50,000, repayable over a six to ten year period, had low interest rates (including a 12-month initial interest free period) and required no personal guarantee or other security.

Clearly, they were very popular. Worryingly, Reuters reports that yet-to-be-published Government data will show that around £1.1bn of BBLs have been classified as suspected fraud. The Government’s current estimate for bounce back loan fraud is for 7.5% of the total lent. In addition to the suspected fraud, banks have claimed £2.6bn worth of government guarantees for loans that were in default, up from £1.6bn in March this time last year.

In an attempt to assist the Insolvency Service investigate such fraud their powers have been extended under the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 (the “Act”). Directors of dissolved companies can now be investigated and will be liable to be disqualified for up to 15 years and even face criminal prosecution in the most serious of cases.

The first four directors have been disqualified by the Insolvency Service for abusing the dissolution process pursuant to powers introduced by the Act. All the directors referenced below dissolved their companies to avoid repaying the BBLs they had obtained. Following the ruling, all four directors have been banned from directly, or indirectly, becoming involved in the promotion, formation or management of a company, without the permission of the court.

The individual facts are as follows:

1. Lewis Wright received a £50,000 BBL despite his company ceasing trading the previous year. Lewis inflated the company’s turnover to receive the maximum amount and then used the funds to pay himself over £47,000. He has since been disqualified for 12 years;
2. Sirfraz Ahmad, was disqualified for 10 years after he exaggerated his company’s turnover to secure a higher value BBL it wasn’t entitled to and then used the £25,000 to repay family members;
3. Max Hadley, received a 10-year disqualification after receiving a £20,000 BBL for his building company before spending £18,000 on payments unconnected to the company; and
4. Jake Joynt received a seven year disqualification after he received a £15,000 BBL and subsequently spent £13,000 of it on personal use.

The rulings from the Insolvency Services send a clear message to directors that have abused the BBL scheme and tried to escape liability by dissolving their company. There has been some criticism of the increased powers granted by the Act as the investigation of such directors will cost a significant amount of time and resources of the Insolvency Service including an opportunity cost of taxpayers’ money. In response to this criticism the Insolvency Service is considering pursuing recovery of the BBL funds by using its legal powers to seek Compensation Orders against the relevant directors.