Fraudulent companies shut down after abusing COVID loan support

Two companies who fraudulently applied for thousands of pounds worth of COVID support loans have been wound up in the courts.

From:
The Insolvency Service
Published
10 August 2021

The two separate companies submitted false documents to at least 41 local authorities and the Government’s Bounce Back Loan scheme to secure £230,000 worth of grants put in place to support businesses during the pandemic.

LV Distributions Ltd and SIO Traders Ltd were wound-up in the High Court in separate hearings on 27 July 2021 following confidential enquiries conducted by the Insolvency Service, which proved neither company ever traded.

Investigators uncovered that SIO Traders registered their offices in Whitchurch, Shropshire, but provided false lease documents and utility bills to 14 different local authorities to fraudulently claim they traded out of premises in their respective areas.

SIO Traders claimed they supplied PPE and secured £95,000 worth of business grants from 10 local authorities. The company also received a £50,000 Bounce Back Loan they were not entitled to.

LV Distributions had registered their offices in Redhill, Surrey, and claimed to sell medical care products. Similar to SIO Traders, in a 10-day period between 17 and 27 August 2020, LV Distributions provided false lease documents and utility bills to 27 local authorities.

The company fraudulently secured £35,000 in business grants from 2 local authorities, as well as a £50,000 Bounce Back Loan. Investigators, however, uncovered that the premises LV Distributions falsely claimed to operate from were either unoccupied, up for rent or occupied by a different company.

Small Business Minister Paul Scully said:

This decisive enforcement action shows that we will not tolerate shameless attempts to defraud the taxpayer and falsely claim public money intended to help businesses through the pandemic.

We are cracking down on Covid fraud across the board and those who have tried to take support they were not entitled to, which was given in response to the worst crisis of our lifetimes, can expect to face heavy consequences.

Herefordshire County Council was targeted on two occasions by SIO Traders. The local authority initially paid £10,000 after SIO Traders’ first fraudulent application but was able to recover the funds in full, before rejecting a second £10,000 application and reporting the company’s activities.

The Council also received a further £10,000 application from LV Distributions, which was also rejected, saving the local authority a total of £30,000 in fraudulent grant claims.

Herefordshire Council’s Cllr Liz Harvey, Cabinet member for finance, corporate services and planning, said:

We have spent more than a year allocating millions of pounds of financial support for local businesses who have been affected by the pandemic. To see companies trying to take advantage of this difficult and unprecedented situation, and fraudulently claim support that is intended to help those who really need it, is despicable.

Herefordshire Council will not tolerate fraud, and it is pleasing to see these two companies wound up.

Guildford Borough Council’s Lead Councillor for Resources, Cllr Tim Anderson, said:

We stopped fraudulent requests from LV Distributions and SIO Traders to register as business rate payers in 2020 which, if successful would, have allowed the businesses to receive a Coronavirus (Covid-19) Business Support Grant.

Defeating fraud involves diligence and public sector bodies working together, and we are pleased that the Insolvency Service has been able to take such strong action.

Cllr Laura Mayes, Deputy Leader of Wiltshire Council, said:

We brought staff from across the council to work together and assess more than 15,000 claims for Covid-19 business support grants. The staff brought their experience and local knowledge to the process, which included counter fraud experience and working with National Anti-Fraud Network.

The lengths that fraudsters went to as they tried to falsely claim grants surprised even our most experienced staff, but by using national counter fraud networks, concerns could be raised quickly and trends and patterns were shared with other authorities.

We are very proud of the way our teams supported so many businesses in extraordinary circumstances, and we are also pleased that they foiled attempts by a small minority to exploit the misery that Covid-19 has brought to so many.

Notes to editors

After the two companies were wound up in the courts, the Official Receiver was appointed Liquidator of the two companies.

All public enquiries concerning the affairs of the companies should be made to: The Official Receiver, Public Interest Unit, 16th Floor, 1 Westfield Avenue, Stratford, London, E20 1HZ. Telephone: 0300 678 0015 Email: piu.or@insolvency.gov.uk.

The petition against SIO Traders Ltd (Company number 11864792) was presented under s124A of the Insolvency Act 1986 on 17 May 2021 at the Business and Property Court in Manchester in front of DJ Bever.

The petition against LV Distributions Ltd (Company number 11892823) was presented under s124A of the Insolvency Act 1986 on 25 May 2021 at the High Court in London in front of Judge Burton.

The Insolvency Service will also soon have extra powers to investigate Bounce Back Loan fraud in cases where the company has been dissolved. The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, currently before Parliament, if passed will give the Insolvency Service powers to investigate, and if appropriate take action to disqualify directors of companies which have fraudulently claimed Bounce Back Loans but which have since been dissolved. This power will be retrospective to allow conduct that took place before the law comes into force to be investigated.

Company Investigations, part of the Insolvency Service, uses powers under the Companies Act 1985 to conduct confidential fact-finding investigations into the activities of live limited companies in the UK on behalf of the Secretary of State for Business, Energy & Industrial Strategy (BEIS).

A Government scorned?

How many of you have taken out a bounce back loan, a CBIL, claimed furlough or even claimed under the Eat out to Help out scheme?  I guess many readers will be nodding their head at this point because most businesses have claimed some of this Government support during the pandemic lockdown.

For many businesses these schemes will act as the saviour and the loans will be repaid in accordance with the terms.  However, there has also been plenty of media surrounding those who have misused or misapplied funds originating from these schemes.  At the end of the day, it is taxpayers’ money (and will have to be repaid in due course) so those more unscrupulous applicants need be aware of the potential consequences.

While bounce back loans and CBILs under £250,000 are not personally guaranteed, directors need to understand that does not mean you escape personal liability.  For example, if a director draws down some of the loan to pay personal liabilities, that in turn creates a directors’ loan account, being a debt repayable to the company.  It can get worse as HMRC could determine that the personal use was income and accordingly, gives rise to PAYE where the director can be held personally liable.

It has been reported that as of 30 June 2021 HMRC had conducted more than 12,000 investigations into coronavirus fraud.  Indeed, there have been several arrests with the number of prosecutions inevitably going to rise over time.  Further, a director in Bolton was disqualified from acting as a director for 11 years after he claimed a bounce back loan when not eligible and subsequently used the funds for personal gain.

In the disqualification case (above) the director, clearly, thought ensuring there were insufficient accounting records would aid his defence as there was no evidence of accountability.  Apart from a failure to maintain accounting records can be a criminal offence, banking records will always offer some form of transaction tracing.

So, what should I do?

I am bound to say, take early advice.

If you have used the corporate schemes for personal benefit, then look at how you are going to repay the amount taken.  When liquidators pursue a director for malpractice, they are looking for restoration and this can become a drawn-out and costly affair for the director.

A common practice appears to be to extinguish personal loans by way of dividends.  However, if the company has insufficient reserves, then drawing dividends is unlawful.  Even if there are sufficient reserves, a loan-extinguishing dividend is exposed to challenge as a breach of duty.

In terms of any breach in the job retention scheme, while it seems concerning, you should confess to HMRC and seek ways of restoring the position.  It is better to approach HMRC and include a proposal for making good than to be found out!

The Government have made it clear HMRC are to adopt a commercial understanding when it comes to recovery of tax liabilities and coming forward early should facilitate a structured restoration agreement.  Stick your head in the sand then be prepared as hell hath no fury like [the Government] scorned!

Should you have an insolvency-related issue then please contact Gary Pettit at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

 

Insolvency Service takes action against businesses abusing COVID-19 financial support.

What will happen with those who abuse the Government-backed COVID financial assistance loans?  This is a question I am being asked regularly and the following release from The Insolvency Service may provide the answer.

“Raashid Khan (26) has been disqualified as a director for 12 years after fraudulently claiming £50,000 through the Bounce Back Loan Scheme (BBLS) before transferring the full amount out of the company’s account to himself just days before his company went into administration.

Khan, from Birmingham, was director of Ikandy Wholesale Ltd, which bought and sold bulk goods, including fireworks and fresh meat.

Despite Ikandy Wholesale’s company accounts being frozen after it was confirmed the company was to be shut down, Khan forged a document to convince his bank that the winding up order had been revoked. This allowed him to transfer around £70,000 out of the account, including a £50,000 Bounce Back Loan, which he had secured less than two weeks previously.

Since February 2021, the Insolvency Service has successfully petitioned the Courts to wind up five limited companies that have been involved in abusing government loans, introduced to help businesses during the pandemic.

These include a furniture retailer in Manchester, and two Glasgow-based companies, for which no legitimate business activity was identified since at least January 2020.

Two of the companies secured Bounce Back Loans, at least one of which was procured based on false information. One of the Glasgow-based companies also secured two Coronavirus Business Interruption Loans totalling £240,000 based on false information.

Dave Elliott, Chief Investigator at the Insolvency Service, said:

‘The Bounce Back Loan scheme was made available to help support businesses during the pandemic. It is outrageous that some directors have been trying to abuse this support, and the action we have taken shows we take this issue extremely seriously.

I urge anyone who suspects a company has been involved in this kind of abuse or has information about directors fraudulently obtaining Covid business support, to alert us immediately’.

The Insolvency Service will also soon have extra powers to investigate Bounce Back Loan fraud in cases where the company has been dissolved.

The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, currently before Parliament, if passed will give the Insolvency Service powers to investigate, and if appropriate take action to disqualify directors of companies which have fraudulently claimed Bounce Back Loans, but which have since been dissolved. This power will be retrospective to allow conduct that took place before the law comes into force to be investigated.

If wrongdoing or malpractice is found, directors can face sanctions including a ban of up to 15 years, and potentially criminal prosecution.

If you suspect a business or company director has behaved fraudulently and abused government loans, you can report it to the Insolvency Service.

Notes to editors

Misconduct: information on companies and directors

 

Raashid Khan is from Birmingham and his date of birth is August 1995. He was director of Ikandy Wholesale Ltd (Company number 09908283).

Global Trading Europe (GTE) was based in Leicester and sold furniture from premises in Manchester under the trading name ‘Unique Homes’. The company had not in fact traded since early 2019. Company director Dariusz Zemanczyk, from Poland, claimed a £50,000 Bounce Back Loan based on fraudulent company accounts. GTE was wound up by the High Court in Manchester on 16 March 2021.

Balgownie Wholesale Distribution Services Ltd based in Glasgow, obtained two Coronavirus Business Interruption Loans totalling £240,000 by provision of false and misleading information. MGH Properties Ltd, also based in Glasgow, obtained a Bounce Back Loan of £50,000. The Insolvency Service investigation identified numerous connections between the companies and the fictitious transactions shown in the bank statements that were produced to prospective lenders. Balgownie’s website stated that it provided services which include distribution, international logistics, and wholesale and that it was a leading international supplier of high-quality stock to the trade and public. However, the website content appeared to have been cloned from that of a reputable company. It was wound up by the Court of Session in Edinburgh on 1 April 2021. MGH had previously operated as a hotelier but ceased involvement in that activity in approximately January 2020. It was wound up by the Court of Session in Edinburgh on 1 April.

In February 2021 Liquor World (Scotland) Ltd (company registration number SC472891) was wound up in the Court of Session in Edinburgh having obtained loans based on false and misleading information, including a £50,000 Bounce Back Loan.

Also in February 2021, Fortress Restructuring Ltd (company registration number SC595429) was wound up in the Court of Session in Edinburgh after an investigation found that the company had obtained a £50,000 Bounce Back Loan based on false and misleading information. The investigation also found examples of misleading marketing material around the company’s insolvency-related services.”

The above actions clearly demonstrate investigations into COVID support malpractice are being done and directors who believe this is relevant to them ought to look on how they can restore the position.

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

Firms reassured over post-Covid debts

BBC Website:  Firms reassured over post-Covid debts – BBC News

 

The government has told business leaders it will take a “cautious approach” to firms that owe it money in the wake of the coronavirus pandemic.

The message came in a letter from Business Secretary Kwasi Kwarteng to the Institute of Directors and R3, which represents insolvency firms.

In the letter, first reported by the Financial Times, he said enforcing insolvency would remain a last resort.

The government has spent billions protecting the economy from Covid.

As part of these efforts, measures preventing firms from being wound up if they fall into insolvency have been extended until the end of September.

However, it is feared some companies could struggle to survive when emergency support measures begin to be removed.

Government help available to businesses includes loans, tax relief and cash grants.

However, many firms will have deferred taxes, including VAT, that will start to fall due as the country emerges from the pandemic.

When company insolvencies involve unpaid VAT and income tax, HMRC has the status of “preferential creditor”, which means it gets paid first.

But business leaders want the government to ensure this is used to help companies restructure, rather than to shut them down.

In the letter, seen by BBC News, the business secretary writes that he “recognises the path back to full trading and coming off government support will be difficult for many companies”.

In response to concerns about firms becoming insolvent because of money owed to the Treasury through loans and support schemes, Mr Kwarteng says HMRC will take a “cautious approach to enforcement of debt owed to government” which has been accrued during the pandemic, “including from the number of loans and support schemes given”.

“It is right that where government has stepped up, through the general taxpayer, to support the economy during this national emergency, that business should do all it can to pay its fair share of taxes and repay back loans where it can,” he says.

He adds that it will be flexible with companies who engage with it in order to manage their debt.

There is pressure on the government to recoup some of the vast amounts spent supporting the economy during the pandemic – and Mr Kwarteng writes that a return to normal insolvency processes will be vital for a healthy economy.

Government extends business support measures.

The Government have announced two further extensions of provisions under the Corporate Insolvency & Governance Act 2020.

 

Commercial landlords

The ability to evict or take goods in lieu of rental arrears has been further suspended until 25 March 2022.  The Government have produced a guide for landlords, which includes financial assistance.  The link is:

https://www.gov.uk/government/publications/covid-19-and-renting-guidance-for-landlords-tenants-and-local-authorities/coronavirus-covid-19-guidance-for-landlords-and-tenants

While this provision can be financially damaging to landlords, tenants also need to understand they must continue to pay rent (whether that is the contractual sum or a reduced amount under an agreement with their landlord) otherwise they are simply accruing a debt that could become unmanageable, while simultaneously increasing the landlord’s frustration, meaning they show less understanding once these provisions are lifted.

Further to the above, a director may have given a personal guarantee or, in non-payment of the rentals, could be exposing themselves to potential malpractice action (which carries personal liability) should their company ultimately fall into liquidation.

Debt enforcement

The restrictions on statutory demands and winding up petitions are being extended for a further three months until 30 September 2021.  The Government claim this is, “To protect companies from creditor enforcement action where their debts relate to the pandemic.”

It is, perhaps, interesting the announcement appears to be silent on extending the moratorium over wrongful trading, although directors, in particular, should not hold the misconception suspending wrongful trading provisions protects them if they continue trading beyond a point where creditors suffer.

While being of the view extending the above provisions further is kicking the can down the road, it is understandable.  The COVID road map has been pushed back until 19 July and with furlough to end in the autumn companies will need to re-adjust their overhead expenditure while also getting their business back on track after the adverse impact of lockdown.  Holding off aggressive creditor action to the end of September provides some breathing space for companies to recover before having to deal with aged debt.  Holding off landlords even further allows additional time for business owners to assess the viability of continued trading.

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

ARE YOU PREPARED FOR ‘NORMAL’ ?

Have you heard the phrase, “You cannot change the past, but you may influence the future?  All too often we blame what has happened rather just accept that it has happened, and we need to address matters going forward.

 

The past 14 months, or so have been arguably the most challenging any of us have experienced but June brings forward two very important dates:

  • Assuming the Government road map stays on course, the 21st is expected to see the end of restrictions and a return to normal life.
  • It is widely believed the (thrice) extended deadline on various interim restrictions and amendments invoked under the Corporate Insolvency & Governance Act (“CIGA”) will end on 30 June.  These include a limitation on serving statutory demands, presenting winding up petitions and landlords taking recovery action for rental arrears.

 

In addition to the CIGA provisions, many businesses will now be receiving notification that repayments of the “Bounce Back” loans are falling due, while the employment furlough scheme is set to end in the autumn.

All the above events will serve to impact on company cash flow, while many will face recovery action from those debtors, frustrated they could not take enforcement action during the CIGA restriction period.  This includes HM Revenue & Customs where enforcement action has been limited to tax evasion and other limited taxation matters.  It is little wonder the Government have extended the restriction period.

Many will be aware of the phrase, “If you fail to plan then plan to fail.”  Unfortunately, all too often, people are great at what they do as a profession, but the accounting/bookkeeping side is seen as a necessary evil.  That may well be the view but if you had a flat tyre, would you carry on driving or stop and do that necessary evil of changing the wheel?

The prediction is UK will endure a short, but sharp economic recession.  As with previous economic challenges, those prepared are generally the ones who survive, so how do you promote the chances of you being one of those survivors?  Here are a few points that I see when assisting companies in financial difficulties:

 

  1. Put together a cash flow forecast (ask your accountant to help if preferred).  When you have this, check actual trading results with the forecast, at least on a monthly basis in order to compare projections with the actual results.

 

  1. Credit control.  Remembering cash is king and a good customer is a paying customer, and your customers are likely to be facing similar post COVID issues as you.  Unpaid debts do not pay the wages!

 

  1. With credit control comes setting and keeping to credit limits.  If you set a credit limit of (say) £5,000 for a customer and an order comes in that exceeds that limit, be bold enough to inform them you cannot entertain that latest order until some of the older invoices are paid.  Yes, some may grumble but your recovery time will improve.

 

  1. Where appropriate, consider negotiating longer debt repayment terms with creditors.  The Government anticipate there should be a lot of forbearance demonstrated by creditors (including HM Revenue & Customs) as, generally speaking and within reason, they would rather recover their debt than find they are on a list of creditors of an insolvency.

 

  1. Avoid the temptation of “Corrective trading.”  What I mean is, for example, do not think hiking your prices will help you recover sales income lost during the COVID restrictions.  While reasonable increases maybe acceptable, pushing that barrier too high will inevitably lose you custom.

 

  1. If in any doubt, seek independent and professional advice, whether that is from your accountant, solicitor, or an insolvency practitioner.  These advisors are there to assist you and steer you in the right direction so use them and use them at an early stage.

 

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

How are you paid?

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As the heading asks, how are you paid?  Is it a fixed salary, flexible hourly rate or on target earnings, or a combination of these?

In just over 32 years working in the insolvency profession I have been confronted with a wide variety of challenges.  However, the single most challenging task is when informing people, they are being made redundant.  It is my own fear, and I will never get used to being that messenger, even if those unfortunate employees being made redundant is for the greater good of saving a business.

When a company enters into a formal insolvency procedure, in most cases employees are entitled to make a claim for their entitlements against the Redundancy Payments Service (“RPS”).  The one regular surprise (it would appear) is that employee claimants includes directors provided they are able to demonstrate they were also employees at the time.

Generally speaking, the entitlements are wage arrears, accrued/unpaid holiday, redundancy and payment in lieu of notice.  In most cases, these claims are assessed quite easily.  You enter your fixed pay details and what you are owed on the online application.  However, what if you are on flexible hours or your income fluctuates due to commission earnings, so you are unable to insert a definitive earning figure?  This has been an issue for as long as I can remember, and “Best guess” tended to be the answer.  A recent announcement has been made by RPS that should partially address this issue.

With effect from 12 April 2021 employees with variable pay are being asked to calculate their entitlements based upon their 52-week average rate of pay.  I say, “Partially” because no computer system can fully address the large divergence in vocations and some employees could actually lose out.  For example, if you were paid commissions based upon holiday bookings, it is fair to assume earnings have been lower than normal over the past 52 weeks due to the pandemic restrictions.  Conversely, an estate agent may have seen an increase in their earnings due to the suspension of stamp duty enhancing property sales.  The question is, will RPS make an exceptional allowance for the impact of COVID?  I would suggest unlikely.

Should predictions be correct once the Government support programmes end, corporate insolvencies will increase and no doubt, the media will make plenty of noise over the scale of redundancies inherit with corporate failure and restructuring.  This prediction will place RPS under considerable pressure and payment target times will be challenged as a result, exposing those made redundant to a difficult time while they await entitlements.

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk

Are we heading for an economic cliff?

How prepared are you for when the COVID-related financial support and other interim measures fall away? 

With the impact of COVID the Government laid down, what was to become the Corporate Insolvency & Governance Act 2020 (“CIGA”) which became law in June 2020 and had retrospective effect to March 2020.  CIGA was seen as a balancing act between the detrimental impact the severe restrictions would have for trading on one hand against shielding business from depleted cash flow on the other.

In January the House of Lords debated over the continued restrictions on creditor enforcement imposed by CIGA.  These restrictions were intended to expire on 30 September but were extended to 31 December and subsequently 31 March 2021.  In general, the restrictions prevented the service of statutory demands/winding up petitions, landlord enforcement and suspended wrongful trading provisions.  As a result of these restrictions, the latest data suggests an unprecedented level of debt has accrued, including over £4.5 billion in rent arrears.

Furthermore, there is an estimated £70 billion of Government-backed lending, together with deferred tax liabilities, which is most likely going to make HM Revenue & Customs (“HMRC”) a major creditor in most insolvencies, resulting in them having significant influence on the destiny of businesses.  This influence is made all the greater following the upgrading of HMRC to secondary preferential status when formal insolvency is required.

So, what is the good news?

Well, the Government have announced an easing of bounce back loan repayments in an effort to ease cash flow demands.  In addition, recognising the resulting position of HMRC and the detrimental effect COVID has caused generally, the House of Lords have stressed HMRC need to be co-operative and engaging with a supportive approach on proposed COVID-affected corporate restructuring.  Clearly, time will tell on this recommendation and I would say this commercial understanding needs to be wider by including landlords and credit controllers who are all seeking recoveries.

I asked in the title whether we are heading towards an economic cliff.  Personally, I would suggest “Normal” (whatever that is) will not occur over night.  So, rather than a cliff as COVID restrictions ease off, maybe the economy will experience a gradual slope.

Whatever the outcome businesses need to be pro-active.  Review your cash flow and look at ways of reducing overheads, particularly while your turnover gradually starts to return to pre-COVID levels.  You should engage with your creditors and for those who are owed money, a commercial understanding is going to be the order of the day.  If all fails, the advice has to be to seek early advice.  It is no coincidence those who do seek early advice find they have more options available then those who leave it until the last minute.  As a Scout will say, “Be prepared.”

Should you have an insolvency-related issue then please contact me at PBC Business Recovery & Insolvency on (01604) 212150 (Northampton office) or (01234) 834886 (Bedford office). Alternatively, you may send an email to garypettit@pbcbusinessrecovery.co.uk or access our website at www.pbcbusinessrecovery.co.uk