Director disqualification during the Covid-19 pandemic

Two of the most notable schemes were the Bounce Back Loans and the Coronavirus Business Interruption Loan schemes which gave the lenders a government-backed guarantee for the majority of the loan repayments notwithstanding the borrower remained fully liable for the debt. One of the eligibility criteria was to self-certify that the business had been impacted by Covid-19.

There is a concern that not all businesses have used the schemes appropriately and the Insolvency Service (the government body that deals with insolvent businesses) is now cracking down on directors who have abused the schemes in the matter of public interest.

It appears that there are broadly three different categories of cases that the Insolvency Service are now pursuing against directors, which could result in disqualification or in some cases prosecution. Below is a brief outline of these cases.

Blatant abuse of the schemes

The purpose and underlying principle of the schemes was to provide a life line of working capital in an attempt to allow the business to survive some of the devastating economic impacts of the pandemic. It is hardly surprising that the Insolvency Service are coming down hard on those directors who have abused the schemes and used the funds for their own personal use or in other contravention of their duties as a director. There are already a handful of cases publicised by the Insolvency Service that fall into this category. One example of such a case is a director who was disqualified for 9 years whereby a Bounce Back Loan was applied for by a company which was already insolvent and had already ceased to trade. The monies were used to pay a single trade creditor. The company had liabilities to HMRC alone of over £94,000.

Other cases – no actual abuse of schemes

It appears that there may be some cases being pursued by the Insolvency Service against directors whereby there are no actual allegations being made against the director for the misappropriation of monies per se, but rather where both schemes have been utilised by the company and there has been a failure by the company to use funds from the second scheme to refinance and discharge any liability owing under the first scheme in full.

This may appear harsh on those directors who have genuinely utilised the schemes for the benefit of the business however factors outside their or their company’s control have meant that the company has spiralled into insolvency before monies due under any previous scheme can be repaid.

Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill 2021

This received Royal Assent on 15 December 2021.

Historically, companies that are dissolved (rather than going through a formal insolvency process) would not give rise to the directors of those companies to face any investigations (and therefore avoid disqualification proceedings or any sanctions for any wrongdoing).

There was therefore a concern that the current dissolution process could be abused by directors who are intending to dissolve companies with liabilities pursuant to the schemes (and therefore phoenix the businesses) and would also allow directors who may have abused the schemes for their own personal use to escape any action.

Therefore the Insolvency Service will now have enhanced powers to investigate and disqualify existing directors of live companies and directors of companies which may have been dissolved. An application can also be made to the Court for an order requiring a former director of a dissolved company, who has been disqualified, to pay compensation to creditors.

What next?

Unfortunately, the Covid-19 pandemic is far from over and it remains to be seen as we move into 2022 whether the government will be forced to act to introduce new measures to support businesses inevitably affected by the Omicron wave, notwithstanding at the time of writing this article there are no restrictions. What is clear however is that the Insolvency Service do not intend to leave any stone unturned in respect of those companies and their directors who have obtained the financial support of the schemes and perhaps not used those funds for what they were introduced for.

If you would like to discuss any of the issues raised in this article, then Ward Hadaway’s specialist insolvency team would be happy to assist. Contact Nik Patel at nik.patel@wardhadaway.com.