some directors may have lured billions from British taxpayers

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In the early days of the pandemic, the Chancellor of Great Britain Rishi Sunak announced business lending schemes as part of a government package to keep businesses from falling. This gave businesses the opportunity to borrow tens and sometimes hundreds of thousands of pounds from participating banks, with more lenient lending criteria and no payment for the first 12 months.

The schemes closed to new applicants on March 31 this year were part of the Instructions from Alok Sharma, the then business secretary, to “raise money.” This saw everything of £ 79 billion in loans to British businesses. Of these, 1.5 million in loans totaling £ 47 billion were for small business return schemes.

The big question is how much of this will be returned. House of Commons Government Accounts Committee estimates that the money back scheme alone will lose £ 16 billion to £ 27 billion due to fraud and inability to pay back from companies. This is a potential default rate of 35% to 60% – with losses almost certainly higher when loans to larger businesses are included. Since all these loans were supported by the government, any non-payment will be borne by the taxpayer.

PricewaterhouseCoopers is currently reviewing its loan portfolio to help the government obtain a more accurate estimate of losses and determine the causes of this huge deficit. The fact that a business bankruptcy could lead to losses is to be expected under the circumstances, given that many of them had to skimp to survive the pandemic and may face difficulties when the government’s layoff plan ends in September.

But fraud also seems to have been a major problem – we have yet to find out to what extent. Parliament is now rushing to close a loophole that may have helped unscrupulous directors turn taxpayer bailouts into an opportunity. So what do we know at the moment and what will happen next?

Loophole

We already have limited evidence of fraud through disclosure from the Insolvency Service (IS) to disqualify a number of directors for abuse of credit schemes. They did this, for example, by fraudulently convincing creditors that their company was a going concern when it was not, and then pocketed the money or transferred it elsewhere.

But there are many directors that IS currently cannot achieve easily. Here they borrowed according to the scheme, took the money, and then closed their company by dissolving. The directors can dissolve the company if it is solvent and must notify creditors in advance. Otherwise, they must use a formal insolvency process, such as liquidation, with all the care this procedure brings. But the requirements are currently loose enough for a company to be liquidated without following the rules.

Silhouette of a company director at his desk
The law made it easier for directors to avoid punishment for fraud.
GaudíLab

Dissolution of a company certainly takes place in the process of company closure. It is a normal part of the life cycle of a company that maintains the order and up-to-dateness of the Companies House register. Over the past six years there were approximately half a million dissolutions every year.

But it also created a loophole that the directors dissolving the company could use in this case. IS can still pursue such directors by returning the company to the register, but this is a complex process. The police can also prosecute fraud, but the government wants another option.

Check

This misuse of companies by directors is hardly new. There has long been a phenomenon known as “phoenixism,” whereby a director closes down company A in trouble, transfers all of Company B’s assets and leaves all of A’s liabilities in this category because was discussed in parliament in respect lending schemes.

The government is trying to fix the dissolution loophole with Rating (coronavirus) and directors disqualification law (breakup companies)… The bill will soon pass its third reading in the House of Commons, recently passed committee stage… This is due to the transfer to the House of Lords after the summer vacation.

If passed, the law would expand the IS network to try to disqualify directors who misappropriated money from credit schemes using a dissolution loophole. This step is necessary to maintain public confidence, protect society from dishonest directors, and maintain the integrity of limited liability companies.

However, the expansion of the rules will only work if IS is properly funded to work with this additional class of directors. There is no indication that the government is going to do this and it is very important that this is factored in along with the changes in the rules. The larger the stick, the better the deterrent.



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