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Director Disqualifications on the increase

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The Insolvency Service have reported an increase in directors being disqualified for misuse of Coronavirus Bounce Back Loans. 

The Bounce Back Loan Scheme was introduced to provide financial support to small and medium sized business affected by the pandemic.  The bounce back loan was to be used for business purposes only to provide financial support to the businesses to include paying their rent, rates, suppliers, purchasing PPE etc.

The Insolvency Service are regularly reporting on director disqualifications, some recent examples include:

  • A director received a bounce back loan of £30,000 for his company.  Of the £30,000, the director spent £8,000 on personal expenditure.  The company was placed into voluntary liquidation in March 2021, the liquidator passed on his concerns of misuse of the bounce back loan to the Insolvency Service for investigation.  Following an investigation, the Secretary of State for Business, Energy and Industrial Strategy accepted a disqualification undertaking from the director, his ban will last 8 years.
  • In October 2019, a company was struggling financially and eventually entered into Company Voluntary Arrangement in February 2020 and Creditors Voluntary Liquidation in December 2020.  In May 2020, 2 directors applied for bounce back loans for £100,000.  At the time of their applications, they failed to declare that their company was insolvent and unable to pay its debts.  The Insolvency Service found that the 2 applications were sham applications for bounce back loans that the directors were not entitled to claim due to the insolvency of the company.  Both directors have been disqualified for 11 years.

The Insolvency Service and Secretary of State can offer an undertaking, if the voluntary undertaking is not accepted they can commence director disqualification proceedings.    The court will take into account a number of factors when determining whether an individual is unfit to be a director as set out in schedule 1 of the Company Directors Disqualification Act 1986 as follows:

  1. The extent to which the person was responsible for the causes of any material contravention by a company or overseas company of any applicable legislative or other requirement.
  2. Where applicable, the extent to which the person was responsible for the causes of a company or overseas company becoming insolvent.
  3. The frequency of conduct of the person which falls within paragraph 1 or 2.
  4. The nature and extent of any loss or harm caused, or any potential loss or harm which could have been caused, by the person's conduct in relation to a company or overseas company.
  5. Any misfeasance or breach of any fiduciary duty by the director in relation to a company or overseas company.
  6. Any material breach of any legislative or other obligation of the director which applies as a result of being a director of a company or overseas company.
  7. The frequency of conduct of the director which falls within paragraph 5 or 6.

The case of  Re Sevenoaks Stationers (Retail) Limited (1991) provides helpful guidance on the range of disqualification that may be appropriate as follows:

  • Two to five years disqualification where the case is not so serious. For example, where there was a short period of offending with little or no harm caused to creditors.
  • Six to ten years disqualification where the facts are more serious than in the lowest bracket but where harm has been caused.
  • Ten years and over for particularly serious cases, where there has been widespread fraud over a long period or where this is the second period of disqualification

At Talbots we regularly advise and represent directors of companies who are being investigated by the Insolvency Service and are instructed to defend claims or negotiate a voluntary undertaking taking the above factors in to account.

For advice and assistance, please contact Jagdip Bains, Head of Dispute Resolution