Formal crackdown on directors who dissolve companies to evade debts

The Insolvency Service has been granted new powers to take to task directors who dissolve companies to avoid paying company debts. This is as a direct result of directors dissolving companies to avoid repaying Government backed loans put in place to support businesses during the Coronavirus pandemic.

The new legislation now extends the Insolvency Service’s powers to investigate and disqualify company directors who have been deemed to have abused company dissolution processes.

Previously the Insolvency Service had these powers to investigate directors of companies that entered formal insolvency such as liquidation and administration. It is also understood that the Insolvency Service may also be instructed to investigate live companies where evidence has been brought to their attention of wrongdoing.

In addition, the new legislation also allows for the Insolvency Service to apply to court for an order to require a former director of a dissolved company, who has been disqualified, to pay compensation to creditors who have lost out due to their fraudulent behaviour.

Should you be a director and are concerned re the new legislation then please do make contact with Gary Pettit, Ian Cooke or Jamie Cochrane (01604 212150) to understand your obligations and responsibilities

garypettit@pbcbusinessrecovery.co.uk

iancooke@pbcbusinessrecovery.co.uk

jamiecochrane@pbcbusinessrecovery.co.uk

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