Company Strike Off and Bounce Back Loans – The Investigators Are on Their Way

In response to the unprecedented increase in company strike offs during the pandemic, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act has recently been passed.

The aim of this Act is to prevent dissolutions where there are outstanding BBL and CBIL loans and also to investigate those companies already dissolved where there has been no investigation into the conduct of the Directors.

So What Just Happened in the Last Two Years??

The BBL and CBIL loans were introduced at considerable speed to help small and medium sized businesses survive the financial impact of the Covid 19 pandemic.  Whilst the loans helped  significant numbers of businesses deal with cash flow and finance restructuring, many others have been unable to survive the pandemic and have either closed down or face the prospect of closure in the coming months.

BBL were subject to minimal underwriting checks and as such, the scale of fraudulent applications and abuse of loan funds is becoming apparent.  There are predictions of £20 billion worth of loans (almost half of the total loans made through the BBL scheme) either being written off or becoming irrecoverable without the intervention of the Act.  Whilst the loans are no longer available, the Government is now taking extensive measures to investigate those who abused the loan process and hold them to account.

A strike off application is an attractive option for Directors, particularly where the company has little or no assets to pay for its own liquidation and also to avoid some of the perceived stigma of a formal insolvency process.  It can however now come with increasing personal risks for Directors.

Curb on Future Strike Offs

Directors whose businesses face closure may be tempted to consider an application to Companies House for the strike off of their company.  The spike in companies being struck off during the pandemic is due in part to creditors not lodging objections to proposed strike offs, something that typically would have been done pre-pandemic by HMRC together with banks and other lenders.

We are however starting to see increasing instances of objections to strike-off applications, blocking applications by Directors and also the automatic compulsory strike-off procedures carried out by Companies House where the company appears dormant but is failing to lodge its annual accounts.

Those who are believed to be most active in objecting to strike-offs are the banks and financial institutions who have advanced BBL’s and CBIL’s to companies.  Those banks and finance institutions are required to demonstrate robust debt monitoring and enforcement policies before any call can be made on the Government backed guarantee for failed companies with outstanding BBL and CBIL loans.

Investigations

The new Act will facilitate a retrospective investigation of the conduct of Directors who have “escaped the scrutiny of a liquidator”.

When a company enters a formal insolvency process, the Liquidator or Administrator is required to submit a report to the Secretary of State on the conduct of each Director.  The purpose of the investigation is to identify Directors whose conduct makes them unfit to be concerned in the management of a company.  Where the conduct is of a serious concern, the Secretary of State, through The Insolvency Service, can seek a disqualification order or an undertaking preventing that person from being a Director.  The disqualification period can range from 1 to 15 years depending on the severity of the unfit conduct.

The new Act now exposes Directors of Companies that have been struck off to the same enquiries and investigations as would have taken place if the company had entered liquidation or administration.

Incorrect applications and misuse of BBL and CBIL loans are now specifically in focus when considering the conduct of Directors.  Those Directors of dissolved companies where these loans have been obtained and the company struck off with some or all of the balance outstanding will find themselves under the spotlight of the Insolvency Service.

It is also worth pointing out that any finding of unfit conduct by a Director may not be the end of the problems for Directors.  The new Act also allows the Insolvency Service to seek financial compensation from a Director, either by way of an undertaking or an application to Court for a Director to pay personally for the financial impact of their unfit conduct. 

We have previously dealt with examples of potential misuse of BBL and CBIL loans, including applications for funds in excess of the entitlements, which can be found here .

Further Risks of the Strike-Off Procedure

Notwithstanding the retrospective investigations that are about to commence, it is worth pointing out that the strike-off procedure already carries risks for Directors.  Failure to follow the correct process can in itself be a criminal offence.

In summary, the key steps to follow in a strike off procedure are:

• The company must have been dormant / non-trading for at least three months prior to the application
• All other parties or organisations who may have an interest in the company’s affairs should be notified ahead of the application (for example HMRC, local authorities)
• Within 7 days of making the application, Directors should send a copy of the application to:
  • All members
  • All creditors including (but not limited to) existing and likely creditors, such as banks, HMRC, trade suppliers, landlords, pension trustees of any employer pension schemes.

It is an offence for a Director to apply for a striking-off if the company is ineligible and also if a Director fails to copy the application to all relevant parties within 7 days of the application.

How We Can Help

The focus of the Act is to target the fraudsters who obtained the loans and then abused the proceeds.  However, the scrutiny of Directors of companies struck off since the start of the pandemic will also expose those Directors who, whilst not being out and out fraudsters, will have made some ill-judged decisions and perhaps taken money out of a company for personal use whilst leaving the loan outstanding.  The Government have made it clear these were loans, not grants, that would have to be repaid.

If you have any clients who have already had their companies struck off where there have been outstanding BBL and CBIL loans, we can review the circumstances and highlight any areas where we think a Director might be exposed under the new Act.

If you have clients who are thinking about making an application for a strike-off of their companies, then they may well be stopped by the increasing objections being submitted by HMRC and the banks.  We can arrange to meet with you and your clients to discuss the alternative steps they should consider.

If you would like to discuss any of the issues we have raised here, then please contact Matt or Andy .