In response to Covid-19 and the disruption it caused to businesses, the government provided a number of packages for companies to aid their cashflow such as the Coronavirus Business Interruption Loan Scheme, the Bounce Back Loan Scheme, the Job Retention Scheme and others. A significant number of companies applied for, and were granted, one or more of these loans. But this begs the question whether these loans have simply masked a company’s pre-pandemic insolvency or whether they kept the business afloat during the national crisis?
As the end of the pandemic approaches and the economy returns to normal, it remains to be seen whether companies will be able to repay these loans. If the loans are not repaid and the company enters liquidation can a director be penalised for not repaying these loans? The short answer is yes.
When a company enters liquidation, a director may face a number of threats such as disqualification, claims by liquidators and/or HMRC. Here we focus on the threat of disqualification.
What is director disqualification?
Being a director means that you have a legal obligation to act in a ‘proper’ manner when undertaking company business. If a director is found to have acted improperly such that their conduct makes them unfit to be concerned in the management of a company, then they may face disqualification. Disqualification can be for a period between two and 15 years.
Examples of unfit conduct include:
- Continuing to trade when you know that the company is insolvent
- Failing to keep proper accounting records
- Failure to pay company tax liabilities
- Not filing statutory accounts and returns at Companies House
- Using company funds or assets for your own benefit
- Fraudulent activity
Once a company is placed in liquidation, the appointed insolvency practitioner is required to file a report, with the Insolvency Service, as part of their official duties. The report asks questions about a director’s conduct during their tenure as director. The Insolvency Service, on behalf of the Secretary of State for Business, Energy and Industrial Strategy, will enquire into the circumstances surrounding the company’s financial misfortunes, looking for any instances of ‘unfit conduct’. If unfit conduct is found, the Insolvency Service will seek a disqualification order and any proceedings must be issued within a period of three years from the date the company entered liquidation.
How does disqualification apply to the coronavirus loans?
Whilst cases will turn on their own facts, a director who liquidates their company without repaying the coronavirus loan is potentially facing problems – questions will be asked as to the purpose and use of the loan. If there is a discrepancy between the purpose and the use, this may be a starting point in establishing whether there has been misconduct by a director.
Top tips – what should directors do in those circumstances?
- Ensure the purpose of the loan is sufficiently documented and recorded in the company’s books and record.
- If there is a difference between the use and purpose of the loan, document the change of purpose and the reasons why.
- If the loan was used to repay directors’ remuneration, ensure that this is supported by an entitlement to be paid.
- Take legal advice – if a company is facing liquidation, take legal advice before appointing an insolvency practitioner so as to understand the threat that a director may be facing post liquidation.