Bounce Back Loans and Compensation Orders

Many directors will be aware that if a company enters liquidation, the conduct of any person who was a director (or acted as a director) of the insolvent company within the previous three years, will be routinely reviewed.  In some cases, this could lead to an investigation by the Insolvency Service.

Misuse of the COVID-19 financial support schemes, particularly the Bounce Back Loan Scheme (BBLS) currently make up a high proportion of the cases being targeted for investigation.  The Insolvency Service has also set out how it intends to improve the targeting and investigation of such cases. 

In some cases, examples of which have been published, the director(s) involved have been disqualified from acting as a company director, for up to 15 years’.  Where BBLS funds have been used by a director personally, or in cases where the funds simply cannot be accounted for, The Insolvency Service is also monitoring how many cases in relation to which it might be appropriate to apply to Court for a compensation order.

What is director disqualification?

The Insolvency Service may investigate your company (or you personally as a director of your company) because of insolvency proceedings, or if there’s been a complaint.  If you failed to follow your legal responsibilities as a director, they will notify you of their findings.

They will explain what has been done that makes you unfit to be a director, that they intend to start the disqualification process, and details of how to respond.  At this stage, you should consider taking legal advice, particularly if you disagree with the findings.

If disqualified, you can be disqualified for up to 15 years.  During this time you cannot be a director of any company registered in the UK or an overseas company that has connections with the UK, or be involved in forming, marketing or running a company.  Alternatively, you could give The Insolvency Service a ‘disqualification undertaking’ which means you undertaken not to be a director on a voluntary basis.

You can read detailed guidance on director disqualification, here.

What is a Compensation Order?

The purpose of a compensation order is to make directors financially accountable for their unfit conduct.  The Insolvency Service can apply for a compensation order, if:

• a director is subject to a disqualification order or undertaking; and
• their conduct has caused a loss to one or more creditors of the insolvent company.

This option is available under the Small Business, Enterprise and Employment Act 2015, which came into effect on 1 October 2015 and an application must be made within two years of the disqualification or undertaking.

If the Insolvency Service does make the decision to seek a compensation order, the relevant director will be served with notice of the proceedings.  At a subsequent Court hearing, the director will have the opportunity to respond to the allegations made and offer an explanation for losses incurred. 

At this stage the Court may agree that a compensation order should be awarded.  If agreed, this will usually result in an order to pay the associated costs and expenses, which could be significant.

What are the alternative options?

Where a director has received a personal benefit from a Covid-19 support scheme or cannot provide evidence as to how the funds were used, the likelihood of disqualification or financial consequences are increased. 

For any director who finds themselves in this position it is important to take advice, and work with the Insolvency Practitioner and The Insolvency Service. 

If you can reach an agreement with the Liquidator regarding the repayment of funds to the company, this will be reported to The Insolvency Service as a mitigating circumstance.  It can also allow you to agree when, and how the funds are repaid.  This could be invaluable if your affordability to pay the compensation is restricted, or you need time to raise funds.

Help from a Licensed Insolvency Practitioner

Keywood Group is a Licensed Insolvency Practice with offices in Birmingham and London.  Our team is experienced in advising businesses and directors on their options.  We provide fully transparent advice and set out the implications of previous conduct, and options remaining.

Our Insolvency Practitioner is fully licensed and regulated by The Insolvency Practitioners Association.  If you want further information, please contact us for a no obligation chat.