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Spike expected in director disqualifications

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With stern measures being taken over abuse of Covid-support schemes, we could be heading towards a spike in director disqualifications.

19th Oct 2023
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A crackdown on the abuse and misuse of Covid-19 financial support schemes could see the number of director disqualifications in 2024 head towards pre-pandemic levels. 

During the decade from 2011 to 2021, the total number of director disqualification orders and undertakings averaged 1,238 per year. Annual figures have been lower since 2020, with annual disqualifications varying between 818 and 1,030, according to data from the Insolvency Service.

Levels of director disqualifications during recent years coincided with lower numbers of company insolvencies during the pandemic. This was largely due to the provision of government support during Covid-19. Although financial assistance was primarily to protect businesses against the impacts of lockdowns and disruption caused by the pandemic, it inevitably helped struggling businesses to survive a little bit longer. Readily available cash from the government was used by failing businesses to prop themselves up in the short term.

Out of breathing space

The most recent monthly insolvency statistics from the government show that registered company insolvencies were 17% higher in September 2023, compared to the same time in 2022. Struggling companies have run out of breathing space afforded to them by Covid cash injections and have since been hit by tough trading conditions and rising costs that have pushed them towards insolvency. 

Increases in company insolvencies are often an indicator of a correlation in rising numbers of director disqualifications. Although this may be the case, we can reasonably expect to see an accelerated trend of director disqualifications resulting from Bounce Back Loan (BBL) fraud and misuse – a factor that accountants may become more and more aware of in the coming months.

Fraud and error 

It’s estimated that losses from fraud and error associated with the BBL scheme amount to £1.1bn. This is according to figures published in the Department for Business, Energy and Industrial Strategy’s annual accounts. These losses are now being chased down by the National Investigation Service, police units across the UK and the Insolvency Service. 

Such action saw over 450 directors disqualified by the Insolvency Service between 2022 and 2023 for abusing Covid-19 financial support schemes. Enforcement action of this nature accounted for around half of all director disqualifications during this year and saw an increase in the average length of bans being handed out. Disqualifications averaged seven years and four months, compared to five years and ten months during the previous year. 

This upward trend is accelerating, and suggests we are heading towards pre-pandemic levels of disqualifications in 2024. During the last financial year, an average of 38 directors per month were being disqualified for abusing Covid-19 financial support schemes. The most recent data from the Insolvency Service shows that between April and July 2023, monthly averages for director disqualifications for these types of allegations reached 58 per month. Alongside this, year-to-date figures for all types of director disqualifications show that average bans have reached eight years and one month. 

The most recent data shows that 382 directors have already been disqualified during this financial year, with 56% of cases due to abuse of Covid-19 schemes, such as BBL. Conservatively, it’s reasonable to think this trend will continue, with over 1,100 directors being disqualified during 2023/24. 

Trend of enforcement action

It’s more likely that the trend will, as recent data suggests, gather increasing pace. There have been high-profile cases of BBL fraud reported in the media, with various agencies aiming to make an example of people who exploited government schemes. There have been prosecutions of directors setting up fake companies to access loans and instances where these same companies have been quickly dissolved. 

What is less reported, and a factor that accountants and their clients need to be aware of, is the differences between fraud and misuse. Lenders who administered the loans applied an eligibility criteria, with part of this covering usage of loan funds and the requirement for loans to provide an economic benefit to a business. “Misuse of facility” is still likely to be flagged as fraud by lenders, and directors need to ensure they appropriately consider and address this. 

Undoubtedly, hundreds, and possibly thousands of directors will receive letters about BBL over the coming months, and we’re likely heading towards a spike in director disqualifications next year. The government is pressing hard to recoup losses and to also show that it will punish exploitation of its emergency measures. This could also have a knock-on effect for accountants who helped clients access Covid-19 finance support schemes, and all parties need to ensure their interests are properly protected amid mounting enforcement action.

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