Insolvency Service to be given new powers to tackle directors who misused COVID loan schemes

21st May 2021

Directors of dissolved companies who have benefited from the Government-backed Coronavirus loan schemes, who now do not intend to repay them, could find themselves facing tough sanctions.

The Government has announced that the Insolvency Service will be given new powers to investigate directors of companies that have been dissolved to avoid the repayment of loans.

Currently, the Insolvency Service has powers to investigate directors of live companies or those entering a form of insolvency, where they believe wrongdoing or malpractice may have occurred.

Where evidence of either activity is uncovered, directors can face sanctions, including a ban of up to 15 years.

The new legislation will extend these investigatory powers and sanctions so that they can be applied retrospectively, enabling the Insolvency Service to also tackle directors who have inappropriately closed companies that have benefited from Bounce Back Loans.

The new measures will also help to prevent directors of dissolved companies from establishing a new, near-identical business under a slightly different name, which often leaves customers and other creditors, such as suppliers, out of pocket.

The new rules will be included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, which will cover England, Scotland, Wales and Northern Ireland.

Similar proposals were announced as far back as 2018 but will be made a reality as part of the Government’s commitment to combat Bounce Back Loan fraud, as announced in this year’s Budget.

Compensation orders

Introduced in 2015, compensation orders make directors financially accountable for the consequences of their unfit conduct. This means that they may have to personally repay money owed to creditors.

These can be sought by the Insolvency Service via the courts following insolvency proceedings, if the director is subject to a disqualification order or undertaking and their conduct has caused a quantifiable loss to one or more creditors of an insolvent company.

Although they are rarely employed by the Insolvency Service, there is potential scope for these to be used alongside the new investigatory powers and sanctions within the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill to recover losses from the misuse of the Covid support schemes.

Although neither the Insolvency Service nor the Government has given any inclination to increase its use of these orders, they could potentially be applied to directors of insolvent businesses, who are perceived to have misused the Bounce Back loans and CBILS.