some directors may have defrauded billions of UK taxpayers
At the start of the pandemic, British Chancellor Rishi Sunak announced business loan programs as part of the government’s series of measures to keep businesses running. This offered businesses the ability to borrow tens and sometimes hundreds of thousands of pounds from participating banks, with relaxed lending criteria and nothing to pay for the first 12 months.
The programs, which were closed to new applicants on March 31 of this year, were part of then-business secretary Alok Sharma’s instruction to “get the money out.” This saw a total of £ 79bn loaned to UK businesses via around 1.7m loans. Of that, 1.5 million loans amounting to £ 47 billion came from the small business rebound program.
The big question is how much of this is going to be paid back. The House of Commons public accounts committee estimates that the rebound program alone will lose between £ 16bn and £ 27bn due to fraud and companies’ inability to repay. This is a potential default rate of between 35% and 60% – with losses almost certainly higher once large business loans are included. Since all of these loans were government guaranteed, any default will be borne by the taxpayer.
PricewaterhouseCoopers is currently investigating the loan portfolio to help the government get a more accurate estimate of losses and determine the causes of this massive shortfall. The fact that there are likely losses from business bankruptcy is to be expected under the circumstances, given that so many people have had to scramble through the pandemic and could have their lives more difficult when the government leave program will end in September.
But fraud also appears to have been a major problem – we still have to figure out how much. Parliament is now rushing to close a loophole that may have helped unscrupulous administrators turn this taxpayer bailout into an opportunity. So what do we know so far and what happens next?
We already have limited evidence of fraud thanks to disclosures from the Insolvency Department (IS) regarding a number of administrators disqualified for abusing loan programs. They did this, for example, by fraudulently persuading lenders that their business was a going concern when it was not, then pocketing the money or transferring it elsewhere.
But there are a lot of directors that the SI cannot easily keep up with right now. This is where they borrowed from the program, took the money, and then closed their business in dissolution. Directors can dissolve a company if it is solvent and are expected to notify creditors in advance. Otherwise, they are supposed to use a formal insolvency procedure such as liquidation, with all the control that this procedure brings. But the requirements are currently flexible enough that a business can be dissolved without following the rules.
Business dissolution certainly has its place in the process of business dissolution. It is a normal part of the business life cycle that keeps the House of Companies register tidy and up to date. Over the past six years, there have been about half a million breakups every year.
But it also created a loophole that administrators who dissolve a business could have exploited in this case. The IS can always go after these administrators by reinstating the company, but it is a complex process. Police can also sue under criminal law for fraud, but the government wants another option.
The law project
Administrators abusing companies in this way is not a new phenomenon. There has long been a phenomenon known as ‘phoenixism’, where a director shuts down struggling company A, transfers all assets to company B, and leaves all liabilities to company A. Some of the abuses around Coronavirus business loans fall into this category, as has been discussed in parliament with regard to loan programs.
The government seeks to correct the loophole of dissolution with the bill on the rating (Coronavirus) and the disqualification of directors (dissolved companies). The bill will soon go to third reading in the House of Commons, having recently passed committee stage. He is expected to advance to the House of Lords after the summer recess.
Assuming the legislation is passed, it will widen ISIS’s net to seek to disqualify administrators who have diverted money from loan programs using the dissolution loophole. This move is necessary to maintain public confidence, protect the public from unscrupulous directors, and maintain the integrity of limited liability companies.
However, extending the rules will only work if the SI receives appropriate funding to pursue this additional class of administrators. There is no sign that the government is going to do this, and it is essential that this be taken into account alongside the rule changes. The bigger the stick, the better the deterrent.