Boomerang Bounce Back: Covid Loans Lead to Director Disqualifications

In 2020, the UK Government introduced a raft of measures to help support businesses during the COVID-19 pandemic such as underwriting loans, grants and increasing tax allowances.

The Bounce Back loan scheme enabled struggling but viable SMEs to borrow up to £50,000 from participating lenders on generous terms – at low interest rates and with no repayments required for the first 12 months. The purpose of these loans was to assist otherwise viable businesses that had been prevented from trading/negatively affected by the restrictions. The funds were not to be used for the personal benefit of the owner/directors of the business.

Unlike the earlier Coronavirus Business Interruption Loan Scheme (CBILS), the banks were not able to take security for these loans and the Government was actively encouraging them to advance the loans as quickly as possible. This meant that there were very limited financial checks applied before a loan was approved; it was, essentially, possible for a business to self-certify that it met the relevant criteria and receive funds directly to their account in a matter of days.

As anticipated, this meant that the scheme was far more susceptible to fraud and abuse. However, the full extent of such fraudulent activity did not start to become clear until the 12-month grace periods ended, and repayments were required to commence. The requirement to repay these loans has resulted in an increase in affected businesses being wound up (liquidised), whether by the directors themselves or by creditors.

That, in turn, has resulted in a number of directors being reported to the Insolvency Service by liquidators (and others) who have discovered misuse of covid support funds. It has also led to actions against directors personally, including bankruptcy proceedings, to account for their misconduct.

In June 2023, the Guardian reported on figures released by the Department of Business and Trade which showed that nearly £1.7 billion worth of government-backed loans had been flagged for potential fraud.

The Insolvency Service has, understandably, taken a firm line on Covid support misconduct and sought to penalise any company directors who have been deemed to have acted inappropriately.

Between 2023-24, the Insolvency Service successfully applied to have 831 company directors disqualified for abusing the Covid support schemes, with an average disqualification period of more than nine and a half years, reflecting how seriously such conduct is being taken.

The most common themes of the reported decisions are business owners inflating the business’ anticipated turnover in order to obtain the maximum loan, taking more than one loan from different lenders for the same business and/or utilising the covid support money for their own personal use; there are a number of stories of directors purchasing luxury watches or cars with funds that were intended to keep the business afloat.

While it’s not possible to discharge any misconduct that has already taken place, directors implicated in such misconduct (whether by accident or by design) can legitimately seek to mitigate any penalty that the Insolvency Service seeks. Strike-off/disqualification proceedings are unlikely to be the full extent of difficulties faced by those directors, with many also likely to be faced with difficult and stressful legal proceedings seeking that they personally repay the misused sums. Additionally, there is also a prospect of compensation proceedings being brought against those directors if they’ve been disqualified.

For insolvency-related issues, contact a member of our Commercial Litigation team on 01437 764723 or email