All things ‘BILS’, Directors Disqualification, recent cases and recommendations

18 February, 2022

by: Tania Clench

In the space of 15 months, from March 2020, the three main Covid loan schemes – Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and a scheme for larger loans, CLBILS – handed out nearly £80bn to businesses.

BBL was the biggest scheme, distributing £47bn to 1.6 million recipients, who were able to borrow up to £50,000 each. Meanwhile, fraud losses were estimated at £4.9bn at the end of March – although PwC, the accountancy firm hired by the government, has since reduced its estimate to £3.5bn.

Banks, intent on protecting their finances, usually apply stringent credit checks to help avoid fraud and ensure customers can repay their loans, but what was eventually agreed for bounce back, amid pressure from the Treasury to speed up loan distribution, was that checks would be dispensed with altogether.

The British Business Bank was clear with the lenders that they were prohibited from carrying out credit checks.

Borrowers, left to self-certify, had to confirm they met certain criteria, namely that they were based in the UK and affected by Covid; that they were in business as of 1 March 2020 and not insolvent as of 1 December 2019.

It has since come to light that certain lenders paid bounce back loans to already dissolved companies, while loans were granted to companies incorporated after the pandemic hit.

Insolvency Service records show some took loans to fund gambling or currency trading – money the government is unlikely to ever recover – while others spent it on things such as home improvements, car raffles or luxury personal items.

What we are now already seeing is the disqualification of directors in cases where misuse/abuse of BBLS has been found and the following are examples of the types of cases being reviewed closely by the Insolvency Service (not an exhaustive list) –

Overstating turnover in an application for a Bounce Back Loan and the loan not being used for the economic benefit of the company
Company receiving a Bounce Back Loan in the sum of £50,000 which increased the bank balance to £93,086. The sum of £90,000 was subsequently transferred to an unknown accounts. In the absence of accounting records, it was not possible to determine if these funds were used for the benefit of the company.
Breach of the conditions of the Bounce Back Loan Scheme by using a BBL of £50,000 contrary to the terms of the BBL Scheme by making a payment of £50,000 that was not for the economic benefit to the company

Although the disqualification period sought in these circumstances range from lower (2-5 years) to top bracket (11-15 years), recent cases reveal that many are actually appearing in the middle to top bracket averaging 6-9 years with 13 years being the highest so far. Most of these disqualifications have been dealt with by the Secretary of State accepting a Disqualification Undertaking which is the administrative equivalent of a disqualification order and can be entered into, voluntarily, without the need for court proceedings. Once accepted by the Secretary of State it has the same effect as a court order and can only be amended by the court.

In other cases, the misuse of BBLs has resulted in the winding up of companies or the extension of bankruptcy restrictions.

One recent case involved the former directors of Scholars Academy Ltd (“Scholars”), a company that purported to be a specialist tuition centre for children aged 5 to 17 who have been disqualified for 10 and 11 years respectively; the Insolvency Service accepted Disqualification Undertakings. Scholars was incorporated in December 2018. One of the directors applied for a Bounce Back Loan (“BBL”) in May 2020 and provided an estimate of company turnover at £200,000. Although it was permitted for a company to apply for a BBL based on projected income in certain circumstances, the Insolvency Service investigation found that the Company’s bank statements showed maximum monthly income of just £640, suggesting that annual turnover was a maximum of £7,680. This meant the business would not have been eligible for a BBL, as it did not meet the £8,000 minimum annual turnover threshold.

Despite this, Scholars received a BBL of £50,000 in May 2020 and subsequently went into voluntary liquidation in January 2021. At the time of liquidation, the directors listed the company’s liabilities to the bank as £7,000, but the bank later notified the liquidator that it was owed £50,000 by the company due to the BBL. The Insolvency Service investigation found that as well as fraudulently inflating the company’s turnover, the former directors used the BBL funds to make monthly payments to four individuals claiming they were genuine business expenses (there was no evidence to support this).

Ikandy Wholesale Ltd – former director Mr Khan was disqualified as a director for 12 years after fraudulently claiming £50,000 through the BBLS before transferring the full amount out of the company’s account to himself just days before his company went into administration. Despite Ikandy Wholesale’s company accounts being frozen after it was confirmed the company was to be shut down, Mr Khan forged a document to convince his bank that the winding up order had been revoked. This allowed him to transfer around £70,000 out of the account, including a £50,000 BBL, which he had secured less than two weeks previously.

A former director of three companies, Porthart Ltd, Bargain Basement 90 Ltd and Bargains Basement 90 Ltd, all registered at the same residential address in Rotherham, were each placed into voluntary liquidation by the director in September 2020. The liquidations triggered an investigation by the Insolvency Service, which found that the director had opened a bank account for each company in June 2020, after the pandemic began, for the sole purpose of fraudulently obtaining three £50,000 Covid-19 BBLS. As there was no evidence that any of the companies had ever traded, none of them were eligible for the loans which, as we know, the Government made available for genuine firms that were struggling keep going during lockdown. Upon receiving the funds, the director made cash withdrawals from each of the company’s bank accounts totalling £24,342. He then set about transferring the remainder of the BBL funds to companies controlled by ‘a close friend’, as well as other third parties. This director was disqualified for 13 years.

A former director of Hiitness Ltd was found to have applied for a BBL and upon investigation, it was established that these loan monies were used to purchase a Rolex watch. Additionally, he transferred £16,050 to his personal account, withdrew £8,410 in cash from the company bank account and transferred £12,500 to other third parties. He was disqualified for 6 years.

A former director of N&S Solutions Ltd, a cleaning services company incorporated in June 2018 was found to have applied for a BBL of £30,000 despite the company being insolvent and having had already ceased to trade meaning that there was no prospect of repayment of the loan. In this case the director used the £30,000 loan to pay £29,940 to a single trade creditor, but ignored other creditors with sizable debts, and also the company’s tax liabilities which amounted to over £94,000. The Insolvency Service accepted a 9 year Disqualification Undertaking from this director.

Since February 2021, the Insolvency Service has successfully petitioned the Courts to wind up five limited companies that have been involved in abusing Government loans, introduced to help businesses during the pandemic. As set out below, these include a furniture retailer in Manchester, and two Glasgow-based companies, for which no legitimate business activity was identified since at least January 2020. Two of the companies secured Bounce Back Loans, at least one of which was procured on the basis of false information. One of the Glasgow-based companies also secured two Coronavirus Business Interruption Loans totalling £240,000 on the basis of false information.

Global Trading Europe (GTE) – a company based in Leicester and sold furniture from premises in Manchester under the trading name ‘Unique Homes’. The company had not in fact traded since early 2019. Company director Dariusz Zemanczyk, from Poland, claimed a £50,000 BBL based on fraudulent company accounts. GTE was wound up by the High Court in Manchester on 16 March 2021.

Balgownie Wholesale Distribution Services Ltd – based in Glasgow, obtained two Coronavirus Business Interruption Loans totalling £240,000 by provision of false and misleading information. MGH Properties Ltd, also based in Glasgow, obtained a BBL of £50,000. The Insolvency Service investigation identified numerous connections between the companies and the fictitious transactions shown in the bank statements that were produced to prospective lenders. Balgownie’s website stated that it provided services which include distribution, international logistics, and wholesale and that it was a leading international supplier of high quality stock to the trade and public. However, the website content appeared to have been cloned from that of a reputable company. It was wound up by the Court of Session in Edinburgh on 1 April 2021. MGH had previously operated as a hotelier but ceased involvement in that activity in approximately January 2020. It was wound up by the Court of Session in Edinburgh on 1 April.

In February 2021, Liquor World (Scotland) Ltd was wound up in the Court of Session in Edinburgh having obtained loans on the basis of false and misleading information, including a £50,000 BBL.

Also in February 2021, Fortress Restructuring Ltd was wound up in the Court of Session in Edinburgh after an investigation found that the company had obtained a £50,000 BBL on the basis of false and misleading information. The investigation also found examples of misleading marketing material around the company’s insolvency related services.

All directors have a duty to ensure their companies maintain proper accounting records and the failure to account for how a Bounce Back Loan was used, or using it for personal payments, can also result in the extension of bankruptcy restrictions. By way of example –

Two directors of a chicken takeaway have had their bankruptcy restrictions extended for 8 years. One of the directors applied for a BBL of £50,000 in the business name after the sale of the company. The money was used to repay a business creditor and who was also a relative of his business partner.

A publican entered into an IVA when his pub closed for lockdown in March 2020.The pub later reopened and traded for a few hours a week until it finally closed in November 2020 due to the reintroduction of COVID-19 restrictions. On 11 November 2020, the publican received a BBL of £19,000. A day later, the supervisor of his IVA terminated the agreement, and confirmed to the Insolvency Service that he had only made 2 repayments.

As a result of the Insolvency Service investigation, it was established that the publican had transferred nearly £17,000 of the BBL into his personal bank accounts. From there, he paid over £4,100 to his ex-girlfriend and spent £1,120 on online gambling. Nearly £3,500 was withdrawn in cash and could not be accounted for. Only £6,500 was allocated as wages for himself to cover the period when he was not working. Separately, he also received £1,100 in business rates refunds in December 2020, just weeks prior to declaring himself bankrupt. He received a further £10,500 in subsequent weeks but failed to disclose this to the Official Receiver.

On 27 September 2021, the ex-publican signed a bankruptcy restriction undertaking that extended the duration of his bankruptcy for 8 years.

It is worth remembering that one of the key motivations for introducing the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 was to grant the Insolvency Service extra powers to investigate Bounce Back Loan fraud in cases where the company has been dissolved and where appropriate, take action to disqualify the former directors of those companies. The Act is retrospective allowing an application for a disqualification order up to three years after a company has been dissolved.

Writer’s comments

The recent cases show that those directors who have misused BBLS are being targeted for relatively high periods of disqualification.

The effects of disqualification can be quite devastating for those owner managed businesses where, to all intents and purposes, the director involved is the business and in his or her absence, the company and its employees are at risk.

Once a disqualification order is made, the Secretary of State issues a press release, which may be picked up by any press, although this would usually be a publication local to the former director unless the matter is particularly high profile.

This adverse publicity for the former director is intended to serve both as a deterrent to others, and as a warning to anyone who may have dealings with the director that they are disqualified.

Any director who is disqualified by whatever provision will have their name included on a central Register of Company Directors, which is available to the public at Companies House and at the Insolvency Service website and is searchable by the public.

Unless they have court permission, the person is disqualified under the Company Directors Disqualification Act 1986 (“CDDA”) for the period stated in the order or undertaking from:

acting as a director of a company;
taking part, directly or indirectly, in the promotion, formation or management of a company or limited liability partnership; and
being a receiver of a company’s property

That person also cannot act as an insolvency practitioner.

A disqualified director cannot, therefore, simply resign as a director, have a family member or friend appointed in their place (whilst continuing to run the company from the shadows (shadow director), or carry on running the company themselves.

As well as the prohibitions and restrictions under the CDDA, restrictions can arise under other statutes or rules of organisations.

Acting as a director while disqualified is a criminal offence, and may also make the individual concerned personally liable for company debts. An undischarged bankrupt is also automatically disqualified from being a director, and it is an offence for him to act as a director.

In certain circumstances, it might be possible to provide mitigating circumstances to the Insolvency Service with a view to reducing the level of disqualification sought.

Alternatively, there might also the option of making an application for permission to act as a director despite disqualification under Section 17 of the Company Directors Disqualification Act 1986 and subject to a set of conditions to be agreed with the Insolvency Service.

Directors Disqualification is a minefield for those unfamiliar with the law and also the practices of the Insolvency Service.

It is all too easy to get bogged down in the detail. Detail is important but not always relevant all depending on what the objective is (i.e. agreeing an Undertaking, supplying mitigating circumstances in an attempt to reduce the proposed disqualification period, defending proceedings or making an application for permission to act as a director) and it is not difficult to end up in the all too familiar space of being unable to see the wood for the trees.

Please take advice early, whether it is in relation to your duties as a director, concerns you may have in relation to your company’s financial affairs or when you have been contacted by the Insolvency Service to alert you of the possibility of disqualification proceedings being brought against you.

We can help with all of this quickly and efficiently from responding to a Directors’ Questionnaire to defending disqualification proceedings and everything in-between.