Directors' disqualification: the Government strikes back against bounce back loan abuse

Recent trends and the impact of Covid loan abuse

The number of directors facing disqualification is on the rise.  After dropping off in the immediate aftermath of Covid 19, disqualifications are back up to pre-Covid levels with 1,037 directors disqualified in 2024/25.  Of particular significance has been the increase in disqualification for Covid loan abuse, notably, abuse of the bounce back loan scheme.  In the last two years c70% of disqualifications have been for Covid loan abuse.

Looking ahead, we are also likely to see an expansion of the disqualification regime by the introduction of new offences through the Finance Act 2024 and the Economic Crime and Corporate Transparency Act 2023 (“ECCTA 2023”).

What is disqualification?

Proceedings for the disqualification of directors are brought by the Insolvency Service after a company has entered liquidation.  The decision of the Insolvency Service will be based on the report which the liquidator is required to make to the about the conduct of directors.  The key grounds for disqualification are:

• Misconduct or unfitness to be involved in company management or act as a director;
• Fraud or engaging in fraudulent trading (defined at section 213 Insolvency Act 1986);
• Persistent breaches of company law, particularly regarding the filing of accounts or other records at Companies House;
• Conviction of a criminal offence in connection with company law;
• Public interest.

Following the recent Carillion liquidation, it was established that disqualification can apply not just to registered directors, but also to non-executive directors.

While a disqualification order is in effect, the individual affected 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.

The period and effect of disqualification

Directors can be disqualified for periods ranging from two to 15 years.  The shorter periods of two-five years usually apply to failures to make Companies House filings.  The longer periods of 11 to 15 years will be sought in more serious cases of misconduct, including fraud.  In recent years the Insolvency Service has tended to focus on the more serious cases.

Bounce back loans as grounds for disqualification

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

The main instances of bounce back loan abuse cited has been:

1. Where a loan was not taken out for a legitimate business purpose and where, for example, the monies were paid out to the director or a third party;
2. Where a dormant company, with no recent trading history, obtained a loan and paid it out to the director or a third party; or
3. Where the turnover of the company is overstated, in order for the full £50,000 loan to be obtained.

Recent extensions to the disqualification regime

The Finance Act 2024 introduced a significant change to the disqualification regime by extending it 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, on 1 September 2025 a new offence, “failing to prevent fraud”, came into effect under the ECCTA 2023.  This offence imposes new criminal sanctions on organisations or “senior managers” in an effort to combat fraud.  At present, the offence only applies to “large organisations”, being organisations which meet two or more of the following criteria:

• More than 250 employees;
• More than £36 million turnover; or
• More than £18 million in total assets.

Although criminal liability is currently limited to large organisations, the introduction of this new offence is expected to expand the scope for disqualification, where directors fail to engage proactively with fraud prevention.  A failure to engage with fraud prevention is likely to be viewed as a breach of a director’s statutory duties, in particular, where risks have been identified but not addressed.  It is suggested that directors are unlikely to avoid disqualification if they adopt a passive or reactive position.

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 through the use of “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 does remove much of 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 or not 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.  The Restructuring & Insolvency team at DMH Stallard have extensive experience in advising both directors and insolvency practitioners in relation to directors claims and disqualification.  We regularly defend directors facing disqualification or applications for compensation orders and can assist in putting together section 17 applications for permission to act as a director. If you need assistance, please get in touch or call 0333 231580.