Insolvency Practitioners Duties Regarding Bounce Back Loan Abuse!

[UK Contractor Accountant]

Insolvency practitioners have been instructed to report fraudulent coronavirus loan applications to the government, ahead of an expected surge in company failures this year.

The Insolvency Service has written to firms advising that “if it appears that a person has applied fraudulently” for the government-backed business interruption loan scheme and bounce back loans, “it is the duty of the insolvency practitioner to consider their reporting obligations”.

Insolvency firms are expecting a “tsunami of winding-up petitions” being presented by creditors this year once a moratorium on restricting the use of such action ends in March.

What types of cases have IP's been given instructions to report to the Insolvency Service?

On the Covid 19 section of the Forum there are several cases listed of Directors using the BBL money to repay their Director Loan advance to the business. Is that regarded as a fraudulent use of BBL money?

 

[ChrisCallaghan]

I expect your final question will depend on a few variables and possibly the judgement of each IP. However I expect most IPs to consider using a BBL or CBILs to repay a director's loan advance as preference. That doesn't necessarily mean 'fraudulent' though, but will likely create personal liability issues for the director(s).

 

[UK Contractor Accountant]

The Insolvency Service has written to firms advising that “if it appears that a person has applied fraudulently”

what scenarios are IP's considering as fraudulently?

Overstating turnover on application?
Not used to Support company business?
Multiple applications?

 

[The Byre]

More importantly - may I applaud your use of a Great Dane as your symbol. Mine is lying on a couch, looking at me and wondering when we are going for a walk in the woods.

 

[UK Contractor Accountant]

More importantly - may I applaud your use of a Great Dane as your symbol. Mine is lying on a couch, looking at me and wondering when we are going for a walk in the woods.

thought I give her an outing as she is likely to be last Dane we will have!

 

[Gavin Bates]

Hi

The Compliance firm that I use has updated our investigation pack and has pointed out that we should consider whether or not the Company meets the original criteria and or the directors have provided any false or misleading statements. It also states that the funds should be used for the purpose that they were provided, which I assume is to support the business.

The criteria can be found here, https://www.british-business-bank.c...unce-back-loans/faqs-for-small-businesses/#f2

Therefore it follows that you would look at any cases where the director had provided false information. For example, a dormant company that has applied for a £50k BBL clearly had no right to so. Or any situation where the funds have been misappropriated.

As Chris has explained the example given is a simple preference and should be pursued by the IP as such as it would be easy to prove and if necessary get a judgement on rather than any other kind of action. Obviously, this is on the assumption that the business fails!

I think in general terms there will be lots of cases coming to court over the next few years. One example is that in the criteria it says the company is not a business in difficulty. So if you were insolvent as of 31 December 2019 should have you applied for a loan? The problem is none of us really know what was meant by the original statement.

I hope this helps.

Gavin

 

[UK Contractor Accountant]

also states that the funds should be used for the purpose that they were provided, which I assume is to support the business.

is repaying Director loan balances which in most cases are interest free with a BBL supporting the business?

 

[Gavin Bates]

As highlighted it is very much a moot point.

If for example the Company continues and pays the BBL back over time, the truth is nobody is going to care.

Of course, you could suggest that the directors are not acting in the best interest of the Company by replacing an interest-free loan with a loan at a higher cost.

The problem will only occur that if the business fails.

It appears that the Government will set up teams to investigate BBL fraud by I guess they will focus on the obvious cases first.

Regards

Gavin

 

[UK Contractor Accountant]

The problem will only occur that if the business fails.

these are the cases I am trying to find out where the line is drawn!

Is this something that IP's are going to give an understanding on before clients sign up?

 

[Gavin Bates]

Obviously, I can't talk for all IP's but certainly, from my point of view, I am now asked what support they have received and how have the funds been used. So using the example given I would say that this a preference and could be pursued.

 

[Ian J]

I am not greatly enamoured of the Insolvency profession as my feeling is that their prime objective is to extract maximum fees for themselves in return for minimum effort and investigating Bounce Back Loan abuse will be too much like hard work.

 

[jimbof]

On the Covid 19 section of the Forum there are several cases listed of Directors using the BBL money to repay their Director Loan advance to the business. Is that regarded as a fraudulent use of BBL money?

IMHO Probably yes, particularly if director wasn't charging interest.
The transaction has no economic benefit to the business and only benefits the director personally, who has now got their money out and saddled the risk onto the bank. Business got nothing out of it. This was one of the terms the director signed up for at the time of taking on the loan, hence breaking it would probably render the application fraudulent.

Then there is the issue that at the point of insolvency, this clearing of the director's loan represents a preference payment which clearly benefits the director to the detriment of every other creditor; which I think puts the director in the position of having to give it back to the company (or at least some proportion of).

 

[jimbof]

I am not greatly enamoured of the Insolvency profession as my feeling is that their prime objective is to extract maximum fees for themselves in return for minimum effort and investigating Bounce Back Loan abuse will be too much like hard work.

To me it looks like a pretty low hanging fruit to boost the company funds the IP can take fees out of...

Let's set the scene; you've got a spiv of a director, who knows they've been a bit naughty but hoped to get away with it, probably a few nice cars on the drive, a smart watch or 2, big house; all the IP has to do is waggle the preference brush at them and I'd imagine the ones who can realise the cash will deliver it.

 

[claire_b]

I am not greatly enamoured of the Insolvency profession as my feeling is that their prime objective is to extract maximum fees for themselves in return for minimum effort and investigating Bounce Back Loan abuse will be too much like hard work.

The more cash you leave in the business, the more likely they are to find 'things to investigate'. It's all about billing to them I'm afraid. One of the reasons I side-stepped the whole thing, sold my ltd co (debts and all), resigned as director and started up again clean.

 

[UK Contractor Accountant]

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.

 

[The Byre]

thought I give her an outing as she is likely to be last Dane we will have!

Why the last one?

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.

Now that's what I call Absolutely Taking the Pish!

Reminds me of the German businessman who (using a loophole in Italian broadcasting law) set up a giant transmitter on an Italian mountain, beaming FM rock-pop music to Switzerland, Austria and Southern Germany. The authorities took it down and confiscated the equipment.

He complained to the local police chief with the words "I thought one could do anything in Italy!"

"Yes, you are right." said the police chief. "But not absolutely anything!"

 

[UK Contractor Accountant]

Why the last one?

have owned 8 Great Danes now, some rescues and some I have bred. Heartbreak every time when they go so this is the last one.

 

[UK Contractor Accountant]

What is amazing LV Distributions Ltd filed first period accounts at C/House showing net assets of £561K?

Not bad for a start up!

https://find-and-update.company-information.service.gov.uk/company/11892823/filing-history

 

[The Byre]

have owned 8 Great Danes now, some rescues and some I have bred. Heartbreak every time when they go so this is the last one.

We're on number eleven in GDs and number five GSD.

 

[UK Contractor Accountant]

Below you will find an overview of a Company Director that has just been hit with a 7 year disqualification for the reasons outlined.

Iurie Grigoras (“Mr Grigoras”) caused Nions Home Ltd (“Nions”) to breach the conditions of the Bounce Back Loan (BBL) Scheme by applying for a Bounce Back Loan of £50,000 when he knew or ought to have known that Nions was only eligible for a loan to a maximum of £23,228, based on total sales income received in 2019.

Of the £50,000, £37,526 was paid out for the personal benefit of Mr Grigoras and his spouse contrary to the conditions for the use of a BBL .

In that:

The BBL criteria allowed a business to borrow between £2,000 and up to 25% of the company turnover (up to a maximum of a £50,000 loan).

Based on sales income received and banked during 2019, Nions was eligible to borrow a maximum of £23,228.

Total sales income received into Nions’ bank account throughout 2019 amounted to £92,911.

On 5 May 2020, Mr Grigoras applied for a BBL of £50,000 on behalf of Nions, stating in the loan application that Nions’ turnover for 2019 was £2,000,000;

On 08 May 2020, funds of £50,000 were credited to a current bank account used as a trading account by Nions.

On 10 May 2020 £50,000 was transferred to another bank account so in effect the BBL monies were ringfenced;

Between 27 July 2020 and 02 November 2020, a total of £37,526 of BBL funds were paid to Mr Grigoras and his spouse which he has stated were in respect of wages due to them both;

On 02 December 2020, Mr Grigoras instructed the Insolvency Practitioner to commence the liquidation proceedings, failing to disclose the existence of the BBL as a liability in the liquidation.

 

[jimbof]

Sounds good to me. Book 'em, Danno. Everyone knew what you were allowed to apply for.

First of many I guess, unless they've just got unlucky and folded that little bit too early (before the inevitable flood).

 

[UK Contractor Accountant]

New One Listed on Insolvency Service Site - 7 Yrs Disqualification.

Mr ******* failed to ensure that ********Ltd maintained and/or preserved adequate accounting records from 20 May 2019, the date of incorporation, to 03 December 2020, the date of liquidation, or in the alternative, he has failed to deliver up adequate records to the Liquidators. As a result, it has not been possible to determine:

• The amount of income generated by ***** and the nature of its disposal;

• Whether ***** Ltd was entitled to £50,000 obtained via a Bounce Back Loan on 01 June 2020 and whether funds so obtained were used appropriately in accordance with the terms of the agreement to provide economic benefit to the company. Of the £50,000 received at least £16,129 was paid to his personal account;

• The final position between him and *****Ltd; • *****Ltd true tax position, including whether ****Ltd should have registered for VAT given the £200,000 turnover declared on the Bounce Back Loan application and any potential tax liabilities to HM Revenue & Customs as a result.

 

[japancool]

I imagine quite a lot of companies that applied for a BBL magically had an estimated turnover of £200,000.

 

[UK Contractor Accountant]

BBL magically had an estimated turnover of £200,000.

yes the magic £200K turnover declaration on BBL.

Wonder what the BBL banks would come up with if they did a search of their BBL applications with £200K listed as the "magic" figure.

 

[UK Contractor Accountant]

Another one listed for BBL abuse - 6 Yrs Disqualification

Between 10 June 2020 and 16 June 2020 Margaret caused P Ltd to breach the conditions of the Bounce Back Loan (“BBL”) Scheme by applying funds totaling £25,000, obtained under the BBL Scheme, for her personal benefit and not for the economic benefit of P Ltd

On 5 June 2020 she caused P ltd to apply for a Bounce Back Loan, (“BBL”) in the amount of £25,000, which was received on 08 June 2020. On 10 June 2020, she caused a cash withdrawal of £10,000 and on 16 June 2020 she caused P Ltd to make a transfer of £15,000 into her personal bank account. She then used these funds to repay friends and family for personal loans made to her.

• In her Director’s questionnaire, she stated that in March 2020 during the lock-down period she first became aware that the company was insolvent due to lack of business and mounting debts.

• On 23 March 2020, the business stopped trading due to the Government imposed lock-down.

• On 4 May 2020 HM Treasury launched Bounce Back loans (BBL”) to enable small businesses to apply and receive 100% government backed loans of between £2,000 and £50,000 via an online application process.

• On 05 June 2021, she signed the BBL agreement stating that the borrower accepts the loan agreement on the terms offered.

• On 08 June 2020, a BBL in the amount of £25,000 was deposited into the bank account of P Ltd.

• On 10 June 2020, a cash withdrawal was made of £10,000 and on 16 June 2020 a bank transfer of £15,000 was made to her.

• In correspondence to the Liquidator, she stated that these funds were utilised to repay personal loans made by friends and family loans when the company commenced trading.

The financial position of the business at Liquidation, as per the estimated Statement of Affairs dated 27 October 2020, recorded an estimated deficiency of £81,451.

 

[jimbof]

Interesting one here:
https://mrbounceback.com/company-director-used-a-lloyds-bank-bounce-back-loan-to/
"K applied for a Bounce Back Loan (BBL) of £14,413, on behalf of K Limited and the company received those funds on 07 May 2020.

Between 07 May 20 and 15 May 2020 Mr R withdrew these funds and used them to “sustain his daily living costs” which was contrary to the terms of the BBL scheme, that was to provide economic benefit to the company rather than his personal benefit."

 

[Elliot Green]

Insolvency practitioners have been instructed to report fraudulent coronavirus loan applications to the government, ahead of an expected surge in company failures this year.

The Insolvency Service has written to firms advising that “if it appears that a person has applied fraudulently” for the government-backed business interruption loan scheme and bounce back loans, “it is the duty of the insolvency practitioner to consider their reporting obligations”.

Insolvency firms are expecting a “tsunami of winding-up petitions” being presented by creditors this year once a moratorium on restricting the use of such action ends in March.

What types of cases have IP's been given instructions to report to the Insolvency Service?

On the Covid 19 section of the Forum there are several cases listed of Directors using the BBL money to repay their Director Loan advance to the business. Is that regarded as a fraudulent use of BBL money?

If the bounce back loan has been incorrectly applied for then that usually has to be reported to HMRC.

 

[Elliot Green]

Another one listed for BBL abuse - 6 Yrs Disqualification

Between 10 June 2020 and 16 June 2020 Margaret caused P Ltd to breach the conditions of the Bounce Back Loan (“BBL”) Scheme by applying funds totaling £25,000, obtained under the BBL Scheme, for her personal benefit and not for the economic benefit of P Ltd

On 5 June 2020 she caused P ltd to apply for a Bounce Back Loan, (“BBL”) in the amount of £25,000, which was received on 08 June 2020. On 10 June 2020, she caused a cash withdrawal of £10,000 and on 16 June 2020 she caused P Ltd to make a transfer of £15,000 into her personal bank account. She then used these funds to repay friends and family for personal loans made to her.

• In her Director’s questionnaire, she stated that in March 2020 during the lock-down period she first became aware that the company was insolvent due to lack of business and mounting debts.

• On 23 March 2020, the business stopped trading due to the Government imposed lock-down.

• On 4 May 2020 HM Treasury launched Bounce Back loans (BBL”) to enable small businesses to apply and receive 100% government backed loans of between £2,000 and £50,000 via an online application process.

• On 05 June 2021, she signed the BBL agreement stating that the borrower accepts the loan agreement on the terms offered.

• On 08 June 2020, a BBL in the amount of £25,000 was deposited into the bank account of P Ltd.

• On 10 June 2020, a cash withdrawal was made of £10,000 and on 16 June 2020 a bank transfer of £15,000 was made to her.

• In correspondence to the Liquidator, she stated that these funds were utilised to repay personal loans made by friends and family loans when the company commenced trading.

The financial position of the business at Liquidation, as per the estimated Statement of Affairs dated 27 October 2020, recorded an estimated deficiency of £81,451.

That case seemed a little obvious but there are cases where there are defences available to directors when it is suggested that they might have misapplied Bounce Back Loan monies

 

[UK Contractor Accountant]

but there are cases where there are defences available to directors when it is suggested that they might have misapplied Bounce Back Loan monies

can you detail some of those defenses Directors are using?

 

[ChrisCallaghan]

can you detail some of those defenses Directors are using?

There is some interesting technical guidance for IPs on this subject in a FAQ from R3:

"(9) What is the view of the Insolvency Service on directors using BBLS loan monies on a reasonable basis to cover their living costs if they had no other means of getting income (e.g. Furlough Scheme)? Particularly, Personal Service Companies where main day to day expenses has always been for the director's services in their company.

This would have to be judged on a case by case basis.

If a director has no other income at all (because they were not eligible under the Furlough Scheme) and they used the BBLS loan monies to draw funds for reasonable living expenses at a rate similar or lower to that pre-pandemic then it would be difficult to justify taking action against the director, particularly if by using the BBLS loan monies in this way there was an economic benefit gained from keeping the company afloat (especially a Personal Services Company). It would be a different consideration if the director had spent the full BBLS loan monies of £50K in a few months outstripping previous drawings."

Quoted from https://www.r3.org.uk/technical-lib...ack-loans-faqs-for-the-insolvency-profession/

 

[jimbof]

There is some interesting technical guidance for IPs on this subject in a FAQ from R3:

"(9) What is the view of the Insolvency Service on directors using BBLS loan monies on a reasonable basis to cover their living costs if they had no other means of getting income (e.g. Furlough Scheme)? Particularly, Personal Service Companies where main day to day expenses has always been for the director's services in their company.

This would have to be judged on a case by case basis.

If a director has no other income at all (because they were not eligible under the Furlough Scheme) and they used the BBLS loan monies to draw funds for reasonable living expenses at a rate similar or lower to that pre-pandemic then it would be difficult to justify taking action against the director, particularly if by using the BBLS loan monies in this way there was an economic benefit gained from keeping the company afloat (especially a Personal Services Company). It would be a different consideration if the director had spent the full BBLS loan monies of £50K in a few months outstripping previous drawings."

Quoted from https://www.r3.org.uk/technical-lib...ack-loans-faqs-for-the-insolvency-profession/

Sounds like a common sense point of view in line with what I was saying previously - if the business would have to be folded / hibernated otherwise, then clearly it can be for the economic benefit of the business for reasonable payments, which might be above the level of their salary and closer to what were previous dividend payments, to have been made; particularly if they mean the director does not have to close up shop and do something else to keep their head above water.

But it will all be a question of nuance and interpretation. Hopefully IPs will take as suggested a common sense approach to it. It is good that you have put this information out there where folk could come across it if they find themselves with an over-zealous IP looking to try and recover such sums.

Now, someone who's lifted 50K in one go and now has a new Range Rover? Book 'em, Danno!

 

[ChrisCallaghan]

Now, someone who's lifted 50K in one go and now has a new Range Rover? Book 'em, Danno!

Well said!

 

[UK Contractor Accountant]

Seem to be coming thick & fast now - 9 Year Ban for this one

"NB (Mr B) caused N Limited (N) to apply for two Bounce Back Loans (BBL’s) of £25,000 each on 16 May 2020 and 27 November 2020 when N did not meet the criteria for the BBL scheme and thereafter used £18,770 of the loan monies for his personal benefit rather than for the economic benefit of the business, in that:

1. On 16 May 2020 Mr B overstated N's turnover in his application for a BBL. A business could apply for a loan of between £2,000 and £50,000 subject to a maximum of up to 25% of turnover in calendar year 2019. In his application Mr B stated N had a turnover of £500k for calendar year 2019. Bank Records show it did not generate any income in calendar year 2019.

2. On 27 November 2020 Mr B applied for the second £25,000 tranche of a BBL at a time when he knew, or ought to have known, that N was insolvent, having sold its property on 17 November 2020 and having no further means of income.

3. The BBL criteria included that the applicant Mr B must not use funds for personal benefit. Having received the BBL of £25,000 on 20 May 2020, Mr B used £10,676 for personal benefit between 20 May 2020 and 17 June 2020.

4. Having received the second BBL of £25,000 on 16 December 2020, Mr B used £8,094 for personal benefit between 20 December 2020 and 19 March 2021 and paid £10,000 to settle the shortfall from the sale of N's property , which he had personally guaranteed. 5. On 18th March 2021 N entered liquidation with liabilities of £50,000 owed for the two Bounce Back Loans"

 

[jimbof]

Seem to be coming thick & fast now - 9 Year Ban for this one

"NB (Mr B) caused N Limited (N) to apply for two Bounce Back Loans (BBL’s) of £25,000 each on 16 May 2020 and 27 November 2020 when N did not meet the criteria for the BBL scheme and thereafter used £18,770 of the loan monies for his personal benefit rather than for the economic benefit of the business, in that:

1. On 16 May 2020 Mr B overstated N's turnover in his application for a BBL. A business could apply for a loan of between £2,000 and £50,000 subject to a maximum of up to 25% of turnover in calendar year 2019. In his application Mr B stated N had a turnover of £500k for calendar year 2019. Bank Records show it did not generate any income in calendar year 2019.

Suprised 9 year director ban is all they're getting, sounds very close if not over the fraud line...

 

[UK Contractor Accountant]

Surprised 9 year director ban is all they're getting, sounds very close if not over the fraud line...

I assume the Liquidators pursue the Director for the return of the BBL funds not properly expended for the economic benefit of the company wherever possible or does that just go by the wayside following the ban?

 

[Lisa Thomas]

I assume the Liquidators pursue the Director for the return of the BBL funds not properly expended for the economic benefit of the company wherever possible or does that just go by the wayside following the ban?

No it doesn't fall by the wayside - the liquidator should definitely take steps to recover, wherever possible/commercial.

 

[UK Contractor Accountant]

No it doesn't fall by the wayside - the liquidator should definitely take steps to recover, wherever possible/commercial.

so in some cases its doubling up? BBL bank gets its money from the Guarantee and the Liquidator gets BBL abused funds returned back to company for the benefit of all creditors.

 

[jimbof]

so in some cases its doubling up? BBL bank gets its money from the Guarantee and the Liquidator gets BBL abused funds returned back to company for the benefit of all creditors.

I don't think it's doubling up. When the company folds it owes money in many places (likely). The money obtained from director can't be solely attributed to the BBL, so it goes to all creditors, inc BBL bank. BBL bank get the different back from the BBB guarantee scheme (it covers their losses plus recovery costs, not original loan + recovery costs).

 

[Lisa Thomas]

Jim is right plus the costs of Liquidation have to be dealt with.

And if the bank has been repaid by the government, the government may have a subrogated claim and can stand in the bank's shoes as a creditor.

 

[UK Contractor Accountant]

Looks like the Traffic Commissioners are also taking BBL abuse into account!

T Ltd has applied for a standard national goods operator’s licence to authorise the use of one vehicle from a site.

The applicant’s bank statement showed an injection of £50,000 referenced BBL. A caseworker questioned the source of this money and the applicant responded “That money is state aid for the company”. A second caseworker requested further detail and that the applicant agree to a finance undertaking to provide further bank statements in the future but a blank response was received. The case was referred to me.

THE HEARING
Ahead of today’s hearing, I checked Companies House. The company posted accounts on 23 March 2021 covering the period 25 March 2019 to 31 March 2020. They identify that the company turnover in that period was £38,346.

DETERMINATION
The applicant had a turnover of £38,346. It was therefore eligible for a bounce back loan in the order of £10,000. This company achieved a bounce back loan five times that amount. I find that the only way that can have been done is by making a false statement on the application. That I find to be fraud.

DECISION
I exercise my gatekeeping role. In making a false application for a bounce back loan, Mr T committed fraud and that is entirely inconsistent with any concept of good repute. His good repute therefore fails to be established and the application is refused.

The application was reliant entirely upon the bounce back loan to establish financial standing. That money was not lawfully available so financial standing is not met. The application is further refused.

A copy of this decision will be passed to The Insolvency Service for further investigation of the company’s apparent wrongdoing and all supporting evidence is available to them.