Covid loan fraud behind almost half of director disqualifications in last year: Phil Sheard

That is a dramatic picture in itself but it doesn’t necessarily tell the full story of why companies are going bust.

If we look a little closer at the current workload of the Insolvency Service, we see that a growing proportion of its time is taken up with the ongoing commercial legacy of the pandemic.

In particular, almost half of all director disqualifications during the current financial year have been accounted for by individuals found to have abused measures designed to sustain firms during lockdown.

The number of such cases has indeed more than doubled in the space of less than 12 months.

There can be little dispute that the package of support put in place by the Government once Covid-19 struck helped prop up many companies which might otherwise have ceased trading.

According to the British Business Bank which co-ordinated the distribution of a number of different loan schemes, at least 500,000 were saved as a result.

The loans arguably had another unintended consequence, though, changing the patterns of behaviour of some directors.

In the past, they might have extracted money from their businesses and looked for ways not to pay company creditors.

They might then look to appoint administrators and, if possible, buy back any remaining assets at an attractive price before resuming trading through a new, so-called phoenix company.

In the last three years, the Insolvency Service data shows that there have been no disqualifications involving phoenix schemes.

That is because directors who might have been tempted by the potential advantages of a ‘phoenix’ have instead been able to rely on Covid loan schemes to keep their companies afloat, maintain their expected level of personal income and lifestyle or both.

Such conduct is usually only detected when businesses collapse and the Insolvency Service is able to determine whether Covid loans have been used improperly.

I am very much familiar with the issue because a sizeable proportion of my current cases are on behalf of lenders and liquidators trying to recover Covid loans.

Not all of those, I should point out, involve impropriety. There are many companies for which repayment of such loans has compounded the hardship caused by the recent rise in operating costs.

Even so, the Department for Business, Energy and Industrial Strategy highlighted last October that at least £1.1 billion of the £46.6 billion handed out in bounce-back business support had been identified as ‘suspected fraud’.

It is, of course, in the interests of the Insolvency Service, taxpayers and the wider business community to pursue wrongdoing.

Vigorous investigation and punishment sends a clear message about what the Service is doing and what company directors should not be doing.

However, if loans have been spent, the task facing liquidators of trying to secure repayment from directors who might also have no discernible assets becomes a thankless task - almost like trying to get blood from a stone.

It is one reason why I suspect that what we’ll be seeing in the future are more disqualifications but fewer recoveries of any meaningful cash.

Phil Sheard is a finance litigation partner at Bexley Beaumont