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“…directors should be mindful of their statutory and other duties when closing down a company and the consequences of misconduct.”

Bounce back loans: biting back

Practice Notes
Bounce back loans: biting back


Rebecca Stratton reviews misuses of the bounce back loan scheme and how practitioners can advise directors

The Insolvency Service reported in September 2022, corporate insolvencies are 16 per cent higher than in the same month in the previous year (1,453) and 11 per cent higher than the number registered three years previously (pre-pandemic: 1,508 in September 2019).

In addition, the covid-19 support measures offered to companies struggling to stay afloat during the pandemic, including unsecured government-backed lending via the bounce back loan scheme (BBLS), have become due for repayment.

There have been many media reports regarding directors who have been found guilty of covid-19 support fraud, including the misappropriation of BBLS funds. The Insolvency Service has the power to investigate directors where it appears BBLS fraud has occurred and recent legislation in the form of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 (the Dissolved Companies Act) has strengthened the powers of investigation available to the Secretary of State (and in turn the Insolvency Service) when it appears there has been misconduct by directors.

Legal advisors who assist directors are likely to see more enquiries from directors regarding investigations from the Insolvency Service and preliminary advice prior to closing down their companies via liquidation or dissolution. Now, more than ever, directors should be mindful of their statutory and other duties when closing down a company and the consequences of misconduct.

BBLS fraud

Lenders who would have usually applied stringent credit checks to avoid fraud and confirm borrowers could repay loans were, during the pandemic, encouraged by the treasury to dispense with such enquiries in order to accelerate loan distribution. To obtain BBLS funds, borrowers were asked to self-certify they were based in the UK, affected by covid-19 and were in business from 1 March 2020 and not insolvent as of 1 December 2019.

The process of self-certification was vulnerable to abuse and misuse. The Insolvency Service has identified a number of instances where BBLS funds were paid to companies that were: already dissolved; incorporated after 1 March 2020; and not able to prove evidence of having ever traded.

The Guardian reported stories of directors applying the BBLS funds on luxury watches, Range Rovers, jet-skis and even flying lessons. PwC, the accountancy firm hired by the government, has estimated losses due to fraud amounting to £3.5bn in relation to the BBLS alone (which was the largest of the covid-19 support schemes and saw £47bn distributed to 1.6m recipients). The Department for Business, Energy & Industrial Strategy (BEIS) expects total covid-19 losses to be £17bn, with almost £5bn of that figure attributed to fraud (with the rest relating to defaults in payment or errors).


If a company is placed into compulsory liquidation, voluntary liquidation, or administration, the office-holder (the liquidator or the administrator) will consider how the directors acted and what decisions they made in the period before the company became insolvent. The office-holder has a statutory obligation to report their findings to the Insolvency Service and identify whether the conduct of any director warrants further investigation and potentially disqualification proceedings. Such (mis-)conduct will include misuse of covid-19 support measures.

If a disqualification order is made or disqualification undertaking is given (the latter of which has the same effect as a disqualification order but is given voluntarily by the director), the individual concerned will be disqualified from acting as a director or being concerned with the management of any company for a period of between two and 15 years. Disqualification significantly impacts an individual’s ability to conduct business, especially in instances where the director represents the business itself.

Disqualification orders and some undertakings are disclosed in press releases issued by the Secretary of State, which may be distributed by other media outlets and published on a publicly-available register, further impacting the reputation of the director and company involved.

There are also potential criminal consequences if a disqualified director fails to comply with a disqualification order or undertaking, with punishments including up to two years’ imprisonment, a fine, or both.

There have been several cases where disqualification orders against directors have been made in instances where there has been misuse or abuse of the BBLS. While most disqualification cases are dealt with by way of a voluntary disqualification undertaking, there have been instances of significant disqualification orders and even criminal liability found against directors:

1)     A director has recently been jailed for two years, after fraudulently obtaining a £20,000 BBLS loan for a company already in the process of being dissolved.

2)     Another director received a disqualification ban of ten years for transferring nearly £50,000, which was funded by a BBLS loan, to a supplier based in Slovakia that the company had never done business with previously and who provided no goods or services in return.

3)     A director has been disqualified from acting as a director for 12 years after fraudulently claiming £50,000 through the BBLS before transferring the full amount out of the company’s account to himself just days before the company entered into administration.

4)     In July 2022, National Investigation Service reported four people had been arrested in alleged cases of BBLS fraud and money laundering totalling £2.1m.

Corporate insolvencies

Since February 2021, the Insolvency Service has successfully petitioned the courts to wind-up five companies involved in abusing covid-19 support. Those companies include a furniture retailer in Manchester and two Glasgow-based companies for which no legitimate business activity was identified since at least January 2020. Two of the companies secured BBLS loans, at least one of which was procured on the basis of false information.

Office-holders (liquidators and administrators) appointed over insolvent companies which have obtained BBLS funds will likely conduct thorough investigations into how those funds were used and the conduct of the directors when dealing with the funds to ensure no wrongdoing or fraud has occurred.

Prior to the Dissolved Companies Act coming into force, it was not possible for anyone to investigate directors of companies that have been dissolved without incurring the time and expense of restoring the dissolved company to the register. This could provide a loophole giving directors a mechanism obtained BBLS funds fraudulently and/or misappropriated those funds and dissolve their companies without being subject to investigation.

The Dissolved Companies Act now seeks to close that loophole by granting the Insolvency Service the power to investigate the conduct of directors of companies that were dissolved without having previously been in an insolvency process. The Dissolved Companies Act also acts retrospectively, so the Insolvency Service can investigate directors where their companies were dissolved before the legislation came into force (subject to the three-year time limit for the Insolvency Service to commence disqualification proceedings).

Advising directors

If a company’s solvency is a concern, directors can take steps to ensure they act reasonably and in accordance with their duties to the company (including the duties codified in the Companies Act 2006). As soon as a director is aware the company is in financial difficulty, the director should raise their concerns with other directors and professional advisors.

Where directors have acted reasonably and properly and have maintained evidence of their conduct, investigations regarding their behaviour may be resolved quickly. However, in some cases directors will need assistance from legal professions to defend their position.

Potentially, companies are trading with entities involved with fraud, are insolvent or have disqualified directors without being aware of those issues. Prudent steps to suggest to business owners during the current climate might involve:

1) Monitoring the company’s financial position regularly (including conducting board meetings and documenting decisions made).

2) Contingency planning in the event key suppliers cease to trade or its directors are disqualified.

3) Conducting additional due diligence on companies/individuals providing guarantees.

4) Conducting   appropriate   searches   on   businesses   and   directors   from   publicly   available sources (such as Companies House, the London Gazette and the Insolvency Service).

5) Obtaining   advice   from   professional   advisors (accountants,   solicitors   or   an   insolvency practitioner if necessary) early on if there are concerns regarding a company’s solvency.

6) If a business is at risk of becoming insolvent it is essential directors contact a licensed insolvency practitioner as soon as possible to take advice on saving the business or winding it down appropriately, minimising liabilities and maximising returns to creditors.

7) If a debtor company enters into an insolvency process, submitting a proof of debt claim as soon as possible.

8) Review contracts and financial agreements carefully to establish what the impact would be if either party enters an insolvency process.

Rebecca Stratton is an associate at Russell-Cooke