An individual ceased trading his Scaffolding firm in Sunderland in December 2019 and immediately began employment with a third party; despite which the enterprising former scaffolder thought it would be a good idea in May 2020 to apply for a £50,000 bounce back loan from HM Government in respect of his previous business. Unsurprisingly, the funds were not applied to the Scaffolding business (which had ceased trading) and instead were used to repay third parties. Our former scaffolder was subsequently made bankrupt on 26 October 2020 and his misapplication of the bounce back loan funds uncovered by the official receiver.

Upon uncovering the debtor's actions the official receiver (who oversees personal insolvencies in England & Wales) extended his bankruptcy restrictions for an additional 10 years by way of a Bankruptcy Restriction Order ("BRO"). The hope of the official receiver was that this example would act as a deterrent to others who abuse or defraud the business support schemes set up to assist businesses during the Covid-19 pandemic.

What is a Bankruptcy Restriction Order:

When someone is made bankrupt or sequestrated they are subject to certain restrictions, for example taking credit or acting as a director. These restrictions are broadly similar between England & Wales and Scotland and normally last for one year after insolvency. They can however be extended or added to as appropriate. For the purposes of this article we will look at the regime in Scotland, which can be found at Sections 155 to 160 of the Bankruptcy (Scotland) Act 2016 ("the Act").

Who can apply for a BRO:

A BRO can be made by the Accountant in Bankruptcy (for an order of less than five years) or by a Sheriff on the application of the AiB (for an order between 5 to 15 years) in circumstances in which it is appropriate to do so having regard to the conduct of the debtor prior to or after the date of his/her sequestration. The type of conduct that can result in a BRO being applied for is varied; the general theme encompasses failure to cooperate with the sequestration process or some element of reckless or deceitful behaviour by a debtor prior to or after their sequestration.

BRO as a deterrent to Fraud:

In our example of the enterprising former scaffolder, fraudulently claiming a bounce back loan for a business that was no longer trading would have incurred a similar BRO in Scotland, as that applied by the official receiver. The extent, however, to which the threat of a BRO will deter an individual from fraudulent behaviour in their dealings with Covid-19 support schemes is rather limited.

Most debtors who behave inappropriately or dishonestly are unlikely to be dissuaded from doing so by a prohibition on becoming a local Councillor or on obtaining credit, given most do not believe they will be caught and sequestrated. So whilst a useful tool to encourage the cooperation of a debtor once sequestrated; to punish misbehaviour and protect the public from the debtor's actions, it is not designed to tackle the herculean task of fraudulent bounce back loans. Perhaps a more likely deterrent is the possibility that the debtor and those like him will be investigated by the UK specialist financial crime authorities for engaging in fraud; indeed I suspect they will be kept rather busy for the next few years dealing with the fall out of similar actions to those of our enterprising scaffolder.