The impact of COVID-19 loan abuse

Having dropped off in the immediate aftermath of the COVID-19 pandemic, the number of directors facing disqualification is on the rise.  In 2024/25, 1,037 directors were disqualified. Of particular significance has been the increase in disqualifications for COVID loan abuse, notably abuse of the bounce-back loan scheme. Over the last two years, approximately 70% of disqualifications have been due to COVID-19 loan abuse.  Looking ahead, the introduction of new offences through the Finance Act 2024 and the Economic Crime and Corporate Transparency Act 2023 (“ECCTA”) are likely to expand the disqualification regime.

What is disqualification?

The Insolvency Service brings proceedings for the disqualification of directors after a company has gone into liquidation. If disqualified, a director will, amongst other things, be banned from acting as a director, as well as from being involved in the formation or management of a company.

Directors can be disqualified for periods ranging from two to 15 years. Longer periods of 11 to 15 years will be sought in more serious cases of misconduct, including fraud.

Bounce-back loans and disqualification

Abuse of the bounce-back loan regime has been treated as fraud by the Insolvency Service, even when the director has made an innocent error, such as an incorrect estimation of turnover in a loan application form. Consequently, the Insolvency Service often seeks disqualification periods of over 10 years. Disqualification for COVID loan abuse has contributed to an increase in the average period of disqualification from five to six years pre-COVID to over eight years.

The main instances of bounce-back loan abuse cited have been:

1. Where a loan has not been taken out for a legitimate business purpose and/or has been taken out by a dormant company, and where, for example, the monies were paid out to the director or a third party; or

2. Where the company’s turnover is overstated to obtain the full £50,000 loan.

Recent extensions to the disqualification regime

The Finance Act 2024 has extended the disqualification regime to any person who is, or has been, a director, shadow director or manager of a company that promotes tax avoidance schemes. It is expected that this measure will result in a significant increase in tax-related disqualification.  In addition, the new ECCTA (not yet fully in force) has created criminal sanctions to combat fraud, which is expected to expand the scope for disqualification.  A new offence of failing to prevent fraud is due to come into effect on September 1st 2025. 

Disqualification and compensation orders

Whilst liquidators will rarely bring a claim against the director(s) for the repayment of a bounce-back loan, the government, via the Insolvency Service, is pursuing a policy of recovering bounce-back loans using “compensation orders”. 

Compensation orders are separate proceedings which can be brought by the Insolvency Service after a director has been disqualified. The proceedings must be brought within two years of disqualification. To be subject to a compensation order, the director must, by their conduct, have caused loss to one or more creditors.

Advice for directors facing disqualification proceedings

It is usually possible for directors to negotiate a reduced period of disqualification by accepting an out-of-court “disqualification undertaking”.  Equally, there may be mitigating factors. If “bounce-back loan fraud” is alleged, mitigating factors might include:

• An innocent error in the completion of the bounce-back loan application;
• The fact that the loan was used for a proper purpose, notwithstanding errors made on the application form;
• Steps taken by the director to repay the bounce-back loan.

Although the repayment of a bounce-back loan does not guarantee that the disqualification proceedings will be withdrawn, it significantly reduces the case for disqualification.

Finally, even if a director is disqualified, section 17 of the Company Directors Disqualification Act 1986 provides a mechanism for a disqualified director to apply to the court for permission to act as a director or to carry out certain management functions.

Permission under section 17 is tightly controlled by the courts, and whether it will be granted will depend on such things as the seriousness of the original offence(s) and whether the company relies on the disqualified individual acting as a director or manager of the business. It can also be easier to get leave of the court if the permission sought is for the disqualified director to act in a limited role or for a limited period.

The key for directors who are facing potential disqualification is to seek the right advice as early as possible.