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Director disqualification and bounce back loans

The Bounce Back loan scheme (BBLS) was introduced by the UK government during the covid pandemic in order to support small and medium sized businesses during the coronavirus (COVID-19) pandemic, to help with temporary cashflow caused by lockdown and the general downturn.

The Bounce Back loan scheme allowed small and medium-sized businesses to borrow between £2,000 and £50,000.  The amount available was based on the company’s turnover, and the company was allowed claim a maximum of 25% of turnover up to a maximum loan of £50,000, at a low interest rate which was guaranteed by the Government.  No interest was charged for the first 12 months and neither the company nor the directors were required to provide any security to the lending bank, this was guaranteed by the government.

Unsurprisingly, there were certain conditions attached, one of which was that the loans were not to be used for personal circumstances, but were only to be used for the benefit of the company.  

Unfortunately, some directors misused bounce back loans and now find themselves facing legal action from the Insolvency Service. In this article, director disqualification solicitor Eleanor Stephens discusses what you can do if you are a director facing disqualification. 

What is directors’ disqualification?

The director disqualification regime was brought in via legislation in 1986 to protect the public against directors that are not fit to act as directors and use the privilege of limited liability. The regime allows for a director of an insolvent company to be investigated by the Insolvency Service (a part of the Department for Business, Innovation and Skills), and if any form of ‘unfitness’ to be a director is found, then they may be subject to being disqualified as a company director for anywhere between 2 and 15 years, depending on the misconduct. 

What does disqualification mean for me as a director?

Being disqualified as a company director means that while disqualified, you cannot either directly or indirectly be concerned or take part in the promotion, formation or management of a company unless (in each case) you have the permission of the court for the number of years that you are disqualified.

In addition, some professions or roles will not let you practice in that role while you are disqualified as a company director. For example, it is not possible to be a pension trustee while disqualified. If you are a professional, or involved with a charity for example, you must check what the situation is if you were to be disqualified as a company director, as there may be additional repercussions for you.

Who can be disqualified?

Registered directors: any person who was a registered director can be disqualified, whatever their role in the company, therefore both executive and non-executive directors can be equally targeted.

Shadow directors: in addition, in order to catch situations where the person really running the company is not officially registered as a director, this regime also applies to ‘shadow directors’. These are the people who really pull the strings and make the decisions relating to the company. Therefore, despite a common misconception, it is really not possible for a director who is disqualified to put their wife/husband in as the registered director but really continue to run the company themselves. Bot can be subject to penalties if this is found.

De factor directors:  They may not be registered at Companies House, but they hold themselves out to be directors, and most people who deal with them believe them to be a director of the company.

How might a bounce back loan (BBL) lead to unfitness and disqualification?

Taking a bounce back loan in itself is not unfit conduct worthy of disqualification, but what you do with that loan might lead to a finding of unfitness against you and open yourself up not only to disqualification but also to personal liability to repay that loan. 

Directors duties:

Directors have certain duties both under company legislation when a company is solvent, and under additional insolvency legislation once the company faces financial difficulties.

When a company moves towards insolvency, the duty of directors shifts from being owed primarily to the shareholders, to being owed primarily to the company’s creditors. Any decisions and actions the company takes when insolvency looks to be likely, must be taken in the interests of the creditors, as well as the company.

If a breach of directors’ duties is found following an investigation by an insolvency practitioner, and a director is found to be personally liable for money to be repaid back to the company, it is very likely that same misconduct will be cited in disqualification proceedings. However, even if no personal liability claim is made, the Insolvency Service can bring disqualification proceedings for a very wide range of unfitness independently.

A condition of being granted a Bounce Back loan is that the loan is used only for the business.  Therefore, very obvious misconduct occurs when the money is used for a director personally, such as going on holiday for example!

Unfitness is also found where the loan was taken out when the company was not actually eligible for it.  The Bounce Back loan was brought in very quickly in order to help businesses in need. The government therefore very much relied on the integrity of directors applying for the loan to tell the truth when applying for the loan because checks were not made at the time.  Directors had to self-certify that the company met the eligibility criteria.  Directors that knowingly mislead a lender in order to obtain a Bounce Back loan have frequently been found to be unfit in disqualification proceedings.

Somewhat less obvious examples of unfitness would be where the loan was used to pay off a particular creditor in preference to another.  Especially if that creditor is connected to the company. This might include repayment of the company overdraft which was personally guaranteed by the directors for example, or repayment of a director’s loan to the company.

If you are concerned about director disqualification you should seek legal advice from an insolvency solicitor like Eleanor. A qualified insolvency solicitor can help give you breathing space if your business is insolvent.

Recent examples of directors being disqualified regarding Bounce Back loans, and period of disqualification given:

This is still a relatively new area given that we are only just moving on from the pandemic. However, the government have taken many cases against directors for unfitness relating to Bounce Back loans and here are some examples:

  • A director was disqualified by undertaking (therefore voluntary agreement) for 9 years for taking a Bounce Back loan when the company was not eligible as it was already in administration (and not trading with no prospect of repayment of the loan).  The money was used to repay one creditor, while other creditors remained unpaid.
  • A director was disqualified for 12 years relating to three separate property management companies where loans were taken out for each but did not meet the eligibility criteria.  They were incorporated in February 2020 and did no business until April 2020.  Bounce Back loan funds were only available to firms that had been doing business on 1 March 2020.  In addition, the director used that money to purchase property, and transferred some of the proceeds of the sale of that property into his personal account.
  • A director was disqualified for 13 years for obtaining Bounce Back loans over 3 companies totalling £150,000 which had never traded, and so did not meet the eligibility criteria. The money was used for cash withdrawals by the director, and payments made to a company owned by a close friend and other third parties. His close friend was also banned as a director for similar reasons.

How can we help?

At Harper James we have many years’ experience advising directors facing investigation both by the Insolvency Service and also by liquidators and administrators.  If you have any concerns on your own personal situation, contact one of our director disqualification solicitors today to talk through your options.

About our expert

Eleanor Stephens

Eleanor Stephens

Senior Recovery & Insolvency Solicitor
Eleanor is a senior insolvency solicitor with over 20 years' specialist knowledge in all aspects of insolvency, both corporate and personal, covering contentious and non-contentious matters.

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