Steve Thomas, Insolvency Partner and Mediator at Excello Law, acted for a director facing an investigation into his conduct after his company entered into liquidation. The insolvent company received multiple loans issued as part of the Covid-19 business support schemes.
While most cases of this kind proceed to investigation, following intervention by Steve and his team the Secretary of State opted not to undertake disqualification proceedings.
The director’s situation
Our client’s business was in a sector heavily affected by Covid-19 and the subsequent lockdowns, and required assistance from the Coronavirus Business Interruption Loan Scheme (CBILS) to ensure it could remain solvent. The company initially received a five-figure ‘Bounce Back Loan’ from a multinational bank, paid into the company bank account in October 2020. The company subsequently applied for and received two separate Coronavirus Business Interruption Loans from other finance providers in March and April 2021.
Following the company entering liquidation, the Insolvency Service proposed to open an investigation into the director’s conduct on the basis that neither of the 2021 loans was used to pay back the 2020 loan.
What are the grounds for a director being disqualified?
When assessing directors’ conduct in the context of insolvency, the court is entitled to judge a director unfit on the strength of that person’s conduct regarding:
1. The insolvent company alone or taken together with the director’s conduct as director of any other company or companies (including overseas companies).
2. Any matter connected with or arising out of the insolvency of any such company (including an overseas company). (Section 6, Company Directors Disqualification Act (CDDA) 1986.)
In determining the question of unfitness, whether to make a disqualification order or the period of disqualification, the court shall have regard, in particular, to the matters set out in Schedule 1 to the CDDA 1986 (section 12C). These matters include:
• Any misfeasance or breach of any fiduciary duty by the director in relation to a company (or an overseas company).
• Any material breach of any legislative or other obligation which applies to the director as a result of being a director of a company (or an overseas company).
• The frequency of any conduct of the director falling within the above two matters.
The purpose of the CDDA 1986 is to protect the public and to encourage higher standards in corporate management. The court must determine whether the respondent director’s conduct, viewed cumulatively and taking account of any extenuating circumstances, has fallen below the standards of probity and competence appropriate for persons fit to be directors of companies.
Our client’s position
In regard to both of the CBILS loans, the director stated that while initially some of the monies paid were intended to repay the 2020 loan, exceptional business expenditure required directing the funds elsewhere to keep the business viable. The director also noted that the company had a viable borrowing proposal and that regardless of the 2020 loan, the CBILS application would have been successful in any event and therefore the monies loaned and utilised for the benefit of the business allowed it to trade throughout the exceptional times the company found itself in.
On the basis that there was no allegation that the director knowingly applied for a CBIL that the company was not entitled to, either in amount or at all, and that therefore it was not expedient or in the public interest to pursue disqualification proceedings, we argued that disqualification was not warranted in this situation. The director was not negligent, nor incompetent or acted improperly.
Conclusion
Steve Thomas says: “After much negotiation and making written representations, we are pleased that the Insolvency Service have closed the investigation into our client. While the Insolvency Service looks critically at companies that have entered into liquidation having received Bounce Back or Coronavirus Business Interruption Loans, the launch of an investigation does not automatically mean disqualification or personal liability. All cases are dependent on their unique facts, but any director facing investigation by the Insolvency Service will require experienced and effective representation.”
