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Rising insolvencies – a sign we’re heading towards a spike in director disqualifications? 

We take a look at the rising insolvencies happening at the moment.

Posted: 23rd November 2023 by Finance Monthly
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With the latest government data showing growth in company insolvencies, Chris Bowers, a partner in the Insolvency and Debt team at Forbes Solicitors, looks at why it might signal a return to pre-COVID levels of director disqualifications.

The latest monthly Insolvency Service statistics show there were 2,315 registered company insolvencies in October 2023. This is 18% higher than the same time last year and followed reporting in September that revealed the highest number of insolvencies during the last two quarters since 2009. 

Data about firms going out of business often provides insight into tough economic conditions and trading challenges in particular sectors. This is undoubtedly true, however, growth in business insolvencies may also be indicating another sign that we’re heading towards a spike in how many company directors are disqualified. 

Unintended effects

Government support measures introduced during the COVID-19 pandemic helped companies avoid insolvency, at least in the short term. State-backed grants and loans provided businesses with quick access to finance that boosted cash flow to keep them afloat. Although this genuinely helped protect businesses from the disruption of lockdowns, it also papered over the cracks for already-failing enterprises. Unanticipated, one-off cash injections enabled struggling businesses to survive a little bit longer. 

Insolvencies are now increasing, in part, because COVID-19 lifelines have run out, and we’re seeing a similar unintended link between government pandemic support and a rise in director disqualifications. Several Bounce Back Loans were improperly acquired and used by individuals and the government is taking action to address this. 

Loan losses

It’s estimated that losses from fraud and error associated with the Bounce Back Loan scheme amount to £1.1billion. This is according to figures published in the Department for Business, Energy and Industrial Strategy’s annual accounts. These losses are being chased down by the National Investigation Service, police units across the UK and the Insolvency Service. 

Such action saw over 450 directors disqualified by the Insolvency Service between 2022 and 2023 for abusing COVID-19 financial support schemes. Enforcement action of this nature accounted for around half of all director disqualifications during this year. 

This upward trend is accelerating. Last year, an average of 38 directors per month were being disqualified for abusing COVID-19 financial support schemes. So far this year, the monthly average has reached 63 disqualifications, with a total of 438 directors already disqualified for allegations relating to abuse of pandemic financial support, according to Insolvency Service data for April to October 2023. Disqualifications of this type currently account for 67% of all disqualified directors. 

These recent trends suggest we’re heading for a spike in annual director disqualifications and a return towards pre-pandemic levels. Data from the Insolvency Service shows that during the decade from 2011 – 2021, the total number of director disqualification orders and undertakings averaged 1,238 per year. Annual figures have been lower since 2020, with disqualifications varying between 818 and 1,030 per year.

Based on current averages, total disqualifications for this financial year could top 1,100 and it’s reasonable to think the figure could be higher, as a tough crackdown on Bounce Back Loan fraud continues. 

Fraud vs. misuse

There have been high-profile cases of Bounce Back Loan fraud reported in the media, with various organisations aiming to make an example of people who exploited government schemes. There have been prosecutions of directors setting up fake companies to access loans and instances where these same companies have been quickly dissolved. 

What is less reported, and a factor that directors need to be aware of, is the differences between fraud and misuse. Lenders who administered the loans applied eligibility criteria, with part of this covering the usage of loan funds and the requirement for loans to provide an economic benefit to a business. ‘Misuse of facility’ is still likely to be flagged as fraud by lenders, and directors need to ensure they appropriately consider and address this. 

Undoubtedly, hundreds, and possibly thousands of directors will receive letters about Bounce Back Loans over the coming months, and we’re likely heading towards a spike in director disqualifications next year. The government is pressing hard to recoup losses and to also show that it will punish exploitation of its emergency measures. Directors need to ensure their interests are properly protected amidst mounting enforcement action.

About Forbes Solicitors:

Forbes Solicitors is an award-winning law firm, with 11 offices across England that looks after the interests of clients nationwide. 

The firm has 57 partners and an overall headcount of nearly 400, advising on a wide range of commercial and personal matters. Forbes specialises in supporting SMEs, providing legal expertise in practice areas including litigation, commercial, intellectual property, corporate legal services, employment and business immigration, insurance, commercial property, and individual services.  

Forbes holds the ISO9001 Quality Certification and in its recent assessment it was described as "exceptional". The firm is ranked as a Legal 500 Top Tier Firm and a Chambers and Partners Leading Firm, receiving 70 nominations in the latest editions. Furthermore, a number of its professionals are included in the elite "Leading Individuals" list, the "Next Generation Lawyers" list, the ‘Rising Stars’ list, and 38 of Forbes' solicitors are listed as recommended lawyers. Forbes is also a member of LawPact® - the international association of independent business law firms – which supports the expansion of its national and global reach.

About Finance Monthly

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