Bounce-back loan fraud comes in various forms and was not a good idea for business owners. Serious actions are now being taken against business owners who have committed bounce-back loan fraud. In this blog, we’re looking into the consequences of bounce-back loan fraud.
At the time of receiving bounce-back loans, we often had people commenting on the fact that directors were ‘getting away with loan fraud’, ‘everyone’s doing it’ and ‘everyone’s spent the money on themselves with extensions and new cars and then got rid of the company’. We’ve always told these directors to be patient because those committing fraud will face the consequences.
We’re going to let you know more about compensation orders and go through some recent reports that have been published online.
At the moment, we are seeing many directors being faced with compensation orders. These orders are used against UK limited company directors to make them pay for wrongdoings. A lot of these are due to bounce-back loan fraud. This could mean they applied for and took more money than they were entitled to, or they received the money and used it for personal benefit rather than to support the company.
Another form of fraud would be taking a bounce-back loan that you weren’t entitled to and then striking the company off. Directors striking companies off after taking a loan they shouldn’t have are likely to face a prison sentence.
These compensation loans are there to try and recover some money for the public purse and to hold these directors accountable.
Example: Croydon-based director hit with 13-year ban and compensation order
This particular director has been disqualified from being a director for 13 years, and they have been ordered to pay £50,000. This was the first one to be secured by the Insolvency Service.
In October 2020, this director took out the maximum loan of £50,000. The company was actually only entitled to take £2000. This has now been investigated, and they’ve found that there was no activity in the bank account up to the point that the director claimed the loan. After that, there were very few transactions going in and out. This director told the bank that they had turned over £200,000 in 2019.
You’ll remember from applying for the loan yourself that it was self-certified. This means that it was open to abuse from the beginning. For those who had incorporated companies before 2019, you must have used 2019’s turnover to claim the loan. You could claim up to 25% of 2019’s turnover, with a cap of £50,000. If you were incorporated after 2019, you could estimate your turnover.
This particular director claimed a £50,000 loan and then transferred themself £40,000 the day after. They took the rest of the money out in cash. In April 2021, they placed the company into liquidation.
During the liquidation process, the insolvency practitioner will have completed a director’s conduct report, which will have been sent to the Insolvency Service. They will have looked at the report and seen that fraud has been committed. At this point, they will try to recoup funds from the director. This highlights how important it is to comply with the liquidator and the Insolvency Service.
This director seems to have buried their head in the sand. In an attempt to get the money back, they have chosen to use a compensation order against the director. Our belief is that if the director fails to pay the compensation order, they will be declared bankrupt.
If this director has a house, buy-to-let properties or other assets, then bankruptcy is going to cause them huge problems. The director has been given five weeks to pay this compensation order back.
Example: Director of a gift company ordered to pay £43,000
Not only has this director been faced with a compensation order, but they have also been disqualified as a director for nine years. This director was entitled to £9000. After claiming the loan, they went into liquidation. At this point, the insolvency service started investigating and chasing the money. The director has said they can’t pay it.
As a result, they have gone to court, and they have been faced with a compensation order and director disqualification.
The reality is that people have been faced with compensation orders because they have something to lose. If they can’t pay, they’ll be made bankrupt.
These compensation orders are being used against people who have not settled it already with their insolvency practitioner or the Insolvency Service. You must comply with any insolvency investigations.
Example: Director who took out a bounce-back loan has been jailed for eight months
It doesn’t seem like there’s a month that goes by where a director isn’t being jailed for bounce-back loan fraud. This director has been sentenced to eight months in prison. They applied for £20,000 through a bounce-back loan for a company that was already in financial distress. If you remember, you had to certify that your business was not experiencing financial difficulties before the pandemic began.
This director overstated their company turnover and withdrew £19,600 the day after the loan was deposited. After this, they dissolved the company using a DS01 form. The Insolvency Service will have investigated this dissolved company, and as a result, the director has been sent to prison for eight months.
If you are being advised to strike a company off with a bounce-back loan, a prison sentence is one of the consequences you may face. If you try to strike off with a bounce-back loan now, the bank will object, but there were many directors who did this early on.
The quarter after bounce-back loans became available, the amount of strike-offs by UK directors went up 743%. This is not a coincidence.
We hope you found this useful and informative. Action is now being taken against directors who have not acted responsibly with their bounce-back loans. Don’t hesitate to contact us for honest advice.
I'm Chris Worden, Managing Director at Director First. With over 7 years of experience, I help UK directors navigate the complex world of UK corporate insolvency. We offer free and independent advice to UK directors and advise them about what options may be available to them if their limited company starts to struggle.
I am passionate about helping other directors overcome their business challenges and get back on their feet, as I was once in the same position as them. I had a business that became insolvent, and the advice out there was confusing and overwhelming. I am here to provide honest and valuable advice to UK directors.
I am proud to say that we are one of the only 5-star corporate insolvency companies on Trustpilot with hundreds of 5-star reviews, and we publish videos weekly on our YouTube channel. Our channel is designed to educate UK directors about insolvency and debt advice.