Bounce back loan fraud, director disqualification and account freezing orders. 

As the country came to a grinding halt in March 2020, the Government was faced with the inevitable task of trying to save thousands of businesses that were already facing a tightening financial noose around their necks within weeks of the first national lockdown. 

The raft of Covid support measures, from the hurriedly implemented Bounce Back Loan Scheme (‘BBLS’) and the furlough scheme, provided a welcome relief for many businesses. Indeed, government figures suggest that in the absence of the scheme up to 500,000 businesses would have permanently ceased to trade in 2020. 

However, the scheme has suffered significant exploitation, with many people defrauding the scheme for their own personal financial gain despite the proviso that the loans were only to be used for the economic benefit of the company.

Although the Government has suggested that over £2.2 billion of fraudulent applications were prevented as a result of the checks implemented by lenders, it has become glaringly obvious that the checks were wholly deficient. Indeed, with mounting pressure from the Treasury to speed up the loan distribution, it appears that many of the basic checks fell by the wayside. Matters were magnified by the British Business Bank's stance of prohibiting lenders from carrying out any credit checks. 

It is not surprising that the scheme was rife for manipulation. The tick box self-certifying application required directors to confirm 2 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.

Given the above, it is unsurprising that PwC reported to the Government that the schemes resulted in an eye-watering estimate of £3.5 billion in fraud losses.

It is noteworthy that it isn’t just the errant director who received loans they were not entitled to that are being targeted. We have seen a sharp increase in the number of directors facing financial claims and director disqualification claims as a result of not understanding or misinterpreting the application criteria and restrictions on how loans were to be used. 

The significant losses to the public purse have emboldened the Insolvency Service in protecting the public from errant directors and pursuing the recovery of funds. The number of director disqualification bans for bounce back loan fraud has naturally increased. 

The Insolvency Service has in the main pursued bans for: 

1. Misconduct in applying for a bounce back loan that the company was not entitled to in part or full
2. Misapplication of a bounce back loan; where funds have not been used for the economic benefit of the company. 

Directors disqualification 

The Insolvency Service has continued to secure a growing number of director disqualifications for bounce back loan fraud and misconduct. Often pursued in conjunction with compensation orders, disqualifications for bounce back loan misconduct is increasing at exponential rates. 

Indeed, a recent Insolvency Service press release revealed that a Birmingham-based director had been disqualified for 12 years after fraudulently claiming £50,000 through the Government scheme. The company received a bounce back loan of £50,000 shortly before the company was placed into liquidation. The funds remained in the account when the company was wound up. As the bank accounts were frozen, the director presented the company bankers with a forged document, suggesting that the winding up had been rescinded. The account was unfrozen and the director immediately transferred £70,000 (including the £50,000 bounce back loan monies) from the company bank account to his personal account. 

Whilst the above case is an example of blatant and contrived misuse of a bounce back loan, there are a steady number of cases that have arisen from far less headline-grabbing facts. In those cases having the right advice will often make the difference in determining whether the Insolvency Service continues with its investigations.

But how has the bounce back loan misconduct changed the Insolvency Service’s pursuit of directors?  

Account Freezing Orders

The Insolvency Service has a very powerful tool in its armoury, and there has been a steady rise in the number of Account Freezing Orders (‘AFO’) being obtained by the Insolvency Service. 

A freezing order is an interim injunction that restrains any disposition or dealing of defendant’s the assets, with the intention of preserving assets until a judgement can be obtained or enforced. Account freezing orders are now being utilised to tackle bounce back loan fraud. 

It provides an immediate ring-fencing of assets to enable the Insolvency Service to undertake its investigations without the fear of assets being dissipated to frustrate eventual recovery action. 

The impact of an account freezing order in conjunction with dealing with an insolvency service investigation will be huge. Not only can it impact your ability to continue running your business, but it will also invariably have an immediate impact on your personal life.

Responding to an account freezing order is key. We can help you vary or set aside an account freezing order, minimise its impact and assist you in dealing with the underlying Insolvency Service investigation. 

Summary 

The impact of a director disqualification ban, lasting anywhere between 2 and 15 years, should not be underestimated. Not only are such bans all too easy to breach, but the professional and personal consequences are far-reaching, and can include;

• Restrictions on current/future employment and business interests
• Criminal penalties if a disqualification order or undertaking is breached
• Compensation orders
• Other financial penalties – e.g., personal liability for company debts if a disqualification order or undertaking is breached
• Professional and personal embarrassment
• Potential claims by the liquidator/administrator of the company.

With such high stakes, seeking legal advice from a specialist director disqualification solicitor is a must. 

As a final word of warning……just because the company is now dissolved does not mean you’re in the clear! 

The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 gives the Insolvency Service powers to investigate, and if appropriate take action to disqualify directors of companies which have fraudulently claimed bounce back loans, even if the company has since been dissolved. The Act has a retrospective effect and can take into account companies dissolved 3 years prior to the Act coming into effect.