Directors behaving badly – Covid-19 edition

Business closed due to covid 19.

You may be aware of the major impacts of the Covid-19 pandemic on business performance and the government support that was offered to many businesses to help their survival. But did you know that over 800 company directors have been disqualified for support scheme abuse in the year 2023/24?

Covid-19 support schemes

Such support schemes include the Bounce Back loans, furlough and the “eat out to help out” scheme. Across all of these Covid-19 schemes, £7.3 billion amounted to fraud, with fraudulent Bounce Back loans alone amounting to approximately £4.7 billion.

The Covid-19 Bounce Back Loan Scheme helped many SME’s borrow between £2,000 and £50,000 at a low interest rate, guaranteed by the government. Businesses were entitled to a single loan of up to 25% of their turnover. By way of example, we see elements of fraud where the amount of the loan was higher than what the company was entitled to or where such loans were not used for the economic benefit of the business, and instead were used for personal purposes.

Director disqualification litigation

Fraud in government expenditure reported by the National Audit Office increased from a total of £5.5 billion in the two years before the pandemic to £21 billion during the pandemic in 2020/21 and 2021/22.

Consequently, there is now a rise in director disqualification litigation following investigations by the Insolvency Service. The Insolvency Service has successfully applied to have 1,430 directors banned for abusing Covid-19 support schemes since their investigations in potential financial wrongdoing began in 2021.

The Law

Under Section 6 of the Company Director Disqualification Act (CDDA) 1986, the Secretary of State has the ability to bring legal proceedings against a director where they consider the court will be satisfied that the person concerned was a director of an insolvent company and the director’s conduct makes them a ‘person unfit to be concerned in the management of a company’.

A significant change occurred in 2021 with the introduction of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021. This was in response to the abuse by directors of the Bounce Back Loan scheme where directors tried to dissolve their companies without following the correct insolvency procedures in an attempt to avoid paying back Covid-19 related Bounce Back loans. As such, the secretary of state can now issue proceedings against these directors more easily.

Director’s disqualification litigation and how we can help

As a result, we have started to see many directors being penalised for abuse of the support available throughout the course of the Covid-19 pandemic.

If you find that you are being pursued, it is highly important that you do not sign or admit to anything, but most importantly that you seek legal representation to protect your position.

Director’s disqualification litigation is now on the rise and many SME’s will be scrutinised. Instructing RLK Solicitors to represent you, especially if the Insolvency Service or HMRC are involved, is the right step forward.

Our specialist commercial and insolvency litigation teams are ready to defend you without delay. We are highly familiar with the Covid-19 schemes and are here to help you – please get in touch with us to find out how we can support you.