Pandemic-related fraud - are directors being held to account?

Government-backed loan schemes implemented to assist ailing businesses during the pandemic have been subject to widespread abuse. An estimated £4.9bn of the £47bn invested in business support loans during the life of the pandemic is thought have been lost to fraud and up to £17bn may never be repaid. In response to concerns about potential abuse of limited company liability, new legislation received Royal Assent on 15 December 2021 - The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 (the Act). But how effective has this been to date in holding directors accountable? What more could be done to investigate fraud?

Government-backed loan schemes

Business support loan schemes implemented during the pandemic were backed by government repayment guarantees to encourage banks to lend to businesses. While the bounce back loan (BBL) scheme offered the smallest value loans (up to £50,000), it was one of the most utilised schemes, perhaps in part due to the ease of application. Initially, it only required directors to answer a short questionnaire and self-certify turnover for their businesses, based on which they would be entitled to claim up to £50,000 for business use. Conservative minister for counter-fraud, Lord Agnew, resigned from government over losses from the schemes due to fraud resulting from “school boy errors”, including a lack of basic checks and verification of claims.  

So what happens when directors have fraudulently claimed sums to which they are not entitled, from these schemes or otherwise? What remedies are now available against these rogue directors under the Act, and what other options are available?

Investigation of directors’ conduct

At the end of the life of a company, if it enters into a formal insolvency process, a licensed insolvency practitioner (IP) will be appointed to act as officeholder. Officeholders will investigate all potential claims against directors and third parties and look to trace and reclaim assets which have been diverted away from the company. There is no equivalent procedure where a company is simply dissolved by the company directors. In an insolvency process, officeholders are also required to submit a report to the Secretary of State on the conduct of directors within three months of their appointment, which could result in disqualification proceedings where misconduct is reported.

Until recently, rogue directors seeking to evade liability could apply to strike off the company through a simple application to Companies House to avoid any investigation or report to the Secretary of State. When applying for strike off, directors are required to notify creditors of the proposed application to provide them with an opportunity to object and pursue any unpaid debts. However, unscrupulous directors would likely have no qualms about making an application for strike off without notifying creditors (such as banks or, indeed, HM Treasury) of any outstanding loans and to seek to get away scot-free.

The Act

Prompted by these concerns, the Act was designed to allow an investigation of directors’ behaviour where the company has been dissolved. The Act allows disqualification proceedings to be brought against directors of dissolved companies and potentially also compensation orders to be made against them. However, the legislation relies primarily upon whistle-blowers (most likely disgruntled creditors) reporting to the Secretary of State regarding misconduct by directors. Further, questions remain about any additional funding to support these new powers and, as always, proceedings against the worst offenders are likely to be prioritised. 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.

Restoration – a costly alternative

The better (but significantly more costly) course of action for a creditor of a dissolved company would be to restore the company, and seek the appointment of an IP to act as liquidator thoroughly to investigate any misconduct or fraud on the part of the directors. Disqualification alone is no substitute for proceedings targeted at recovering sums due to creditors from rogue directors, such as through claims for breach of duty, transactions defrauding creditors and undervalue / preferential payments. However, an IP will only be prepared to take the appointment as liquidator with funding, either via access to company assets or creditor funding. Funding a liquidator where recovery is uncertain is a significant cost, and risk, for creditors following on from successful restoration and winding up proceedings, which many will be unable (or unwilling) to bear.

Disqualification proceedings relating to fraudulently claimed BBLs are certainly on the increase, as demonstrated by the list of disqualification orders on the Insolvency Service website. Almost a third of cases listed in March 2022 cited BBLs in the details for the orders made. However, disqualification proceedings alone provide cold comfort to creditors who have been short changed by fraudulent behaviour. In the case of the BBL scheme, where companies are unable to repay, the cost will be borne by the public purse under the Government guarantees supporting these loans.

 This article was first published in Fraud Intelligence and can be accessed here.