The expression ‘slippery as an eel’ comes to mind when considering the directors of a company closed down this month for abusing the Covid loan scheme.
Lincolnshire based The Eel Screen Company, an eel protection business, provided false turnover figures in 2020 to secure a £50,000 Bounce Back Loan, the maximum allowed under the scheme which was designed to support businesses during the pandemic. Financial inconsistencies were also found in the company’s application for a £225,000 Recovery Loan Scheme loan almost two years later.
Insolvency Service investigators discovered that the first loan had been obtained quoting annual turnover of £320,000 in 2019, against bank records showing £49,000. Of the second £225,000 received by The Eel Screen Company, £148,000 was withdrawn as cash. One of the former directors of the company told investigators that the business was involved in the installation of screens to protect eels in rivers. A second director said it had since moved into drainage and, most recently, the construction business. Directors also failed to produce accounting records on request to the Insolvency Service.
A further egregious example of Covid loan fraud emerged in recent days as the head of Northern Ireland based KMAerospace was banned as a director for 12 years – a hefty sanction on the Insolvency Service’s scale of two to 15 years – after receiving two loans of £25,000 from two separate banks within days, based on inflated turnover figures.
More than four years after the government’s Bounce Back Loan (BBL) Scheme was rolled out to save small businesses at risk from pandemic lockdowns, closer scrutiny of businesses now unable to repay the loans is leading to action against an increasing number of individuals, not just company directors, for abusing the system. The Insolvency Service has been throwing the book at individuals who made false applications, in some cases not even trading when they received the funds.
Bankruptcy Restrictions Orders (BROs) and Bankruptcy Restrictions Undertakings (BRUs) have been secured against these people, whose conduct has been considered dishonest or blameworthy.
BRO and BRU restrictions prevent individuals from:
- Acting as a director of a company, or forming, managing or promoting a company, without permission from the court
- Carrying on business under a different name without telling people you do business with the name (or trading style) in which you were made bankrupt
- Trying to borrow more than £500 without saying you are subject to restrictions
- Being a trustee of a charity or many pension schemes
- Working in various posts in education or the health industry
- Holding posts in some public authorities, or in similar organisations
Recent BRUs have been handed down for periods of between 10 and 12 years. Between April and June 2024, the Insolvency Service secured 28 bankruptcy restrictions and 208 director disqualifications relating to Covid financial support scheme abuse allegations. In both cases these were more than three-quarters of total sanctions.
Separately, the Insolvency Service is wasting no time launching official investigations into those voluntarily dissolving companies (outside a Creditors’ Voluntary Liquidation) with outstanding BBLs. In theory there is no ‘comeback’ on Directors whose businesses default on BBLs: their personal assets are safe since the loans are unsecured and involve no personal guarantees. The debt is written off once the company is liquidated, so liability doesn’t transfer, provided Directors have complied with their statutory duties.
Government investigators and appointed Liquidators will pick apart a company’s financial record in the run-up to insolvency. There are countless examples of questionable payments and enrichment on the back of BBLs, with some extreme cases well documented. Improper use of these lifelines will almost certainly make Directors personally liable for this outstanding debt.
The Insolvency Service’s tighter grip on directors is revealing wider fraud issues beyond government loan abuse The number of cases sent to the service’s compliance and targeting department has more than doubled to more than 1,000 per month. There is no place to hide.
Individuals and directors at risk of personal liability, either from earlier BBL applications or from trading in the run-up to company insolvency, are encouraged to get in touch with us at Buchler Phillips for a free initial consultation.
This article is written by Jo Milner, Managing Director at Buchler Phillips, an independent boutique firm, with an impeccable Mayfair London heritage, specialising in corporate recovery, turnaround, restructuring and insolvency.