The UK’s first quarter figures for corporate insolvencies were almost 40% lower than the corresponding quarter for 2020. No surprise really, given the level of Government support to business these last 12 months. Part of this support has been in the form of the Bounce Back Loan Scheme [“BBL”] aimed specifically at the SME market whereby the Government has guaranteed 100% of the loan up to the maximum loan available of £50,000. The figures are truly astounding, with £46.6b of BBLs having been approved by 21 March 2021 and shared amongst over 1.5m qualifying claimants. There has been much speculation regarding fraudulent claims, particularly as the Office for Budget Responsibility has itself predicted a default rate of 40% on BBL and Coronavirus Business Interruption Loans.
In a classic case of closing the barn door after the horse has bolted, the Government is proposing new legislation to try and close a loophole that has, in the past, allowed rogue directors avoid scrutiny by simply paying £10 to Companies House to have their company struck off. Now of course, the strike off procedure, as laid out in the Companies House website, requires a detailed protocol to have been followed before making the strike off application, a key requirement being that directors advise all creditors that they intend to apply for strike off. The problem is that directors do not need to provide evidence to Companies House that they have complied with the terms of the protocol and there is no mechanism in place for Companies House to check compliance. So, for many years now, directors have avoided the proper consequences of liquidation – visibility and accountability, as they simply make the application without informing creditors.
The new legislation will give the Insolvency Service [“TIS”] powers to investigate directors of companies that have utilised the aforementioned strike off route to fraudulently avoid repayment of the Government backed BBL loans. At the moment, TIS only has powers to investigate directors of companies that are still live or have entered some form of insolvency process.
And the additional resource to be given to TIS to enforce the new rules? Answer came there none.
Let us be aware of the facts as they now stand- even in the current system, TIS very rarely investigates directors of companies that are subject to a formal insolvency process. In the year 2020/2021, a total of 972 directors were disqualified with formal corporate insolvency procedures for 2020 totaling 12,557. It is nigh on impossible to get the number of directors actually involved in those insolvencies, but let us assume, for the sake of illustration, that each insolvent company had 2 directors. Accordingly, of the estimated 25,114 directors that were allegedly subject to the scrutiny of TIS in 2020, less than 4% were actually disqualified. In fact, the percentage is probably lower as disqualification orders tend to lag the actual numbers of insolvencies in any given year. One suspects that the percentage for disqualifications in 2020/2021 probably corresponds more with the number of corporate failures in 2019 which was a figure of 17,225 i.e., less than 3% of directors of insolvent companies.
For a long time now, Insolvency Practitioners have lobbied for changes to the current strike off regime to ensure that it is being used correctly and not as a means of allowing dodgy directors to avoid proper examination. However, it has suited the purpose of successive Governments to downplay the number of companies that actually go bust, turning a blind eye to the misuse of the strike off rules. It is a shame that a looming write-off bill of over £18.5b for BBL has only now prompted this partial closing of a well-known loophole.
A non-apocryphal story
The day after the proposed new legislation was announced, the writer received an email and then took a call from the “brother” of a director of two companies in the retail sector. The caller was concerned that his “brother” may find himself in personal difficulties as both companies had taken the maximum bounce back loan, but were insolvent and had ceased to trade. The creditors for each company were roughly landlord [£70,000], HMRC [£50,000] and Bank [£50,000]. There had been [but now no longer apparently] a substantial overdrawn director loan account on one of the companies and there were intercompany balances, yet to be properly calculated. During the course of the call, I happened to go on to the Companies House website and look up the companies concerned and yes, you have guessed it, for both companies a Strike Off application had been made the day before. I pointed this fact out and idly speculated whether or not the correct strike off procedure had been followed [i.e., were creditors given prior notice]. The line went rather quiet with the caller stating that he would “get back to you ASAP”. The following day, I came across a report in The Times commenting upon the proposed new legislation. I though it appropriate to forward a copy of the article to the caller. I have not heard back yet, but I am sure that he will “get back to me ASAP”.