Director disqualifications over COVID loan abuse more than double in a year

Figures obtained by a Manchester law firm show that the number of company directors disqualified for abusing COVID loans has more than doubled in the past year.

Bexley Beaumont analysed the figures and revealed that 312 individuals have so far been struck off during the current financial year.

That compares with 141 during the whole of the previous 12 months and equates to almost half of all director disqualifications since March 2022.

Finance litigation partner, Phil Sheard, said the data shows the availability of support to help companies survive the pandemic led to a change in director behaviour.

However, he has warned that while they illustrate how the authorities have pursued the individuals responsible, they don’t necessarily mean that the sums involved will be recovered.

He said: “In the past, some company directors would, for instance, extract money from their businesses and then look for ways to avoid paying company creditors.

“They would look to appoint administrators and, if possible, buy back any remaining assets at an attractive price and resume trading through a new, so-called ‘phoenix’ company.

“The figures which the Insolvency Service has released make clear that there have been no disqualifications for such ‘phoenix’ schemes in the last three years.

“That is because directors who might have been tempted by the potential advantages of a ‘phoenix’ have, instead, been able to rely on COVID loan schemes both to keep their companies afloat and maintain a level personal income and lifestyle.”

He added: “It will no doubt hearten taxpayers and company directors who behave in a perfectly legitimate fashion to see that action is being taken against wrongdoers.

“Even so, it’s only when businesses collapse that the Insolvency Service is able to determine whether COVID loans have been used improperly.

“By that point, the loans may have been spent and the task facing liquidators of trying to secure repayment from directors who might also have no discernible assets is almost like trying to get blood from a stone.

“I suspect that what we’ll be seeing in the future are more disqualifications, but fewer recoveries of any meaningful cash.”

Mr Sheard’s comments follow the publication of data by the Insolvency Service relating to company disqualifications up to end of December last year.

At that point, 670 directors had been struck off during the current financial year – a drop of 18% on the previous 12 months (817) and almost half the figure in 2018 (1,257).

The Government announced a series of schemes during the first half of 2020 to enable businesses to weather the severe economic effects of a lockdown aimed at preventing the spread of coronavirus.

Delivery of the Coronavirus Business Interruption Loan Scheme (CBILS), Coronavirus Large Business Interruption Loan Scheme (CLBILS), Bounce Back Loan Scheme (BBLS) and Future Fund was done in partnership with the British Business Bank (BBB).

Without such assistance, the bank concluded, at least 500,000 jobs might have been lost.

However, the latest annual report of the Department for Business, Energy and Industrial Strategy (BEIS) which was published in October, set out the extent to which some company directors sought to “take advantage of this vital intervention by defrauding the scheme for their own financial gain”.

The Department explained that lenders involved in the scheme had prevented £2.2bn-worth of fraudulent applications, but had also identified £1.1bn of the £46.6bn actually handed out in COVID support as “suspected fraud”.

In addition, it said that the Insolvency Service has opened 273 investigations into Bounce Bank Loan Scheme frauds with a total value of £160m since September 2020, resulting in the arrests of 49 people.

Last month, Dame Meg Hillier, chair of the House of Commons’ Public Accounts Committee, outlined her frustration at official efforts to recover more of the sums lost, describing issues with policing of the COVID schemes as amounting to an “open goal for fraudsters”.

Mr Sheard noted that a “sizeable proportion” of his current workload featured COVID loans in one form or another.

One case involved a company which had attempted to obtain loans from two separate lenders when it was only entitled to apply for one.

He added that the risk of having sanctions imposed by authorities keen to tackle fraud had arguably heightened directors’ fears of insolvency for legitimate enterprises.

Further government figures showed that £4.538bn of all loans made was either in arrears or defaulted at the end of September.

“A rise in operating costs, in combination with the strain of having to repay COVID loans, is leading to far greater levels of insolvency for companies trying to do the right thing,” he said.

“Some businesses are prioritising those loan repayments over other business debts and that, of course, has knock on effects for other firms and lenders and the wider economy.”