Directors' Duties: Fraud and the Pandemic

If you have fraudulently obtained Covid-19 financial support, such as a Bounce Back Loan, you must be pretty worried by recent headlines that show company directors being disqualified, fined and jailed.

Current figures show that an anticipated £4.9 billion has been lost in Covid support fraud. More than 70% of the Insolvency Service's current investigations relate to Bounce Back Loans and other Covid support schemes, such as furlough payments. So far, as a result of these investigations, there have been: 180 director disqualifications, 70 bankruptcy restriction orders and 21 public interest winding ups.

The current investigations into the Bounce Back Loan scheme - which were government loans to support businesses with low interest rates and deferred periods for repayment - show that there have been a very high number of fraudulent applications made.

With a view to holding those accountable for this financial fraud, the Insolvency Service have been working closely with Companies House (and the police) to identify companies which have been struck off the register after receiving Bounce Back Loans. Section 1006 of the Companies Act 2006 is being deployed as a way to take action against fraudsters who seek to strike companies off the register without telling their creditor (i.e. the government who gave them the loans). In addition, if a business does end up in an insolvency process, insolvency practitioners are also doing their diligence and checking on what government support was received by a company and whether it was used for the appropriate purposes.

Worryingly, the reports show that organised crime gangs have been involved in this financial fraud, taking the Bounce Back Loan money and then disappearing. However, what we understand to be far more prevalent is the number of opportunistic directors fraudulently obtaining Covid financial support and then misappropriating it. For example, using the loan funds for their own personal expenditure such as using the Bounce Back Loan to pay off other high interest loans, or spending the money on personal items such as an engagement ring. Let's be clear: this is a breach of a director's duty.

What the Insolvency Service has also found is that directors have been overstating the company's turnover when applying for Bounce Back Loans so that they can obtain a higher amount. Examples include a director who claimed a £250,000 turnover despite the company not even trading, in order to claim the full £50,000 Bounce Back Loan. In that case, it resulted in a director disqualification of 12 years. Another, rather extreme example, which again resulted in a lengthy ban was a charity that obtained a £50,000 loan, which the director used to pay off his divorce.

What is clear is that the Insolvency Service is determined to find and hold directors who have committed Covid financial fraud accountable. The sanction which is likely to be used most frequently is director disqualification, which prevents a person from being able to be involved in the promotion, formation or management of a company without court permission. It can last from 2 to 15 years.

If you are disqualified it can have serious repercussions for your reputation and your career. Disqualification prevents you from being able to work in certain professions. For example, you cannot be a solicitor, police officer or a registered social landlord. In addition, you may be precluded from being employed on health or social care boards and acting as trustee of a school or pension scheme.

The impact of disqualification can be extremely serious. Directors should therefore be very clear about what their duties and obligations are and be aware of the consequences of breaching their duties.