Footing the bill: How the government’s crackdown on BBLS fraud could impact business owners

Thursday October 27, 2022

How to adapt to shifting legislation on insolvency fraud

A total of more than £73 billion was provided to 1.6 million firms via the government’s support schemes, with the majority going to ‘micro businesses’ with nine employees or less.

The biggest of these schemes – by some distance – was the Bounce Back Loan Scheme (BBLS), which ran from May 2020 to April 2021. The BBLS offered all businesses loans of up to £50,000 – or 25% of their turnover – to help them get through the crisis, which acted as a valuable lifeline to businesses across all sectors of the economy.

However, its streamlined application process unfortunately left the scheme open to abuse from fraudsters looking to take advantage of state generosity, and it is expected that a staggering £4.9 billion will be lost to fraud.

In response, the government is now taking action to retrospectively penalise these unscrupulous applicants through the introduction of new insolvency regulation, with a particular focus on the liquidation process.

With this in mind, it is important that business owners are aware of how this shifting legislative landscape may affect them moving forward.

Abuse of power

The appeal of the BBLS was easy to understand; businesses could borrow for either six or 10 years, with no repayments for the first year and an annual interest rate of 2.5%. Alongside this, the lifeline came at a time when the other main source of business support, the Coronavirus Business Interruption Loan Scheme (CBILS), was being criticised for its sluggish response, with banks struggling to process applications amid extraordinary demand.

With firms needing capital quickly, the application process was streamlined to include fewer checks and measures than normal. However, although this was undoubtedly done with the best of intentions, it allowed some to take advantage of the relaxed rules.

In some cases, fraudulent applications were made in the name of dormant companies. In other instances, businesses overstated their turnover to access more funds than they were entitled to. Alongside this, there were cases of directors dishonestly diverting loans which were supposed to be ringfenced for business use to their own personal assets.

Perhaps the most common tactic deployed by fraudsters was to dissolve the business to avoid repayment of BBLS loans. Once a company name is removed from the register, it no longer legally exists, leaving the directors with a clean slate.

The Insolvency Service does have the power to investigate when companies are dissolved, and if wrongdoing is found, a business can even be restored so the directors can be held to account. But the reality is that more than 400,000 companies were dissolved in 2020 to 2021, meaning that some dubious dissolutions could inevitably slip under the radar.

While this money was provided by banks, it was guaranteed by the government, so arguably will be left to taxpayers to foot the bill. In response to public criticism of the way the scheme was being administered and the impact on the public purse, the government has moved to ramp up its power to chase down fraudsters.

Do the right thing

In December 2021, the Insolvency Service was granted new powers to penalise company directors who were trying to escape their liabilities by dissolving companies.

The changes would mean that those directors who were trying to avoid repaying government-backed loans, put in place to support businesses during the pandemic, could be investigated and disqualified from being a company director for up to 15 years.

Now prosecutors have signalled their intent in using these powers, a number of directors have been penalised for trying to dissolve their companies without repaying bounce back loans they had secured during the pandemic.

They have all been banned for between seven and 12 years, during which they cannot be a director of any company registered in the UK, an overseas company that has connections with the UK, or be involved in forming, marketing or running a company.

They also face the prospect of Compensation Orders being issued against them to recover the cash they borrowed, which ranges between £15,000 and £50,000.

It’s now clear that anyone who tries to avoid their BBLS bill will feel the impact of the law. This makes it all the more important that any business owner unsure of the right solution calls on the support of an experienced recovery professional.

They will be able to present all the options and give honest advice about the best way forward. That could include finding a way to continue operating, winding a business up to preserve value for creditors or selling the business and its assets.

Either way, it’s important to tackle the issue head on, with complete transparency.

Related team

Emma Priest

Emma Priest

Emma Priest

  • Director
  • Restructuring Advisory
  • Brentwood