Biggest Write-Off in Corporate History? Coronavirus Support Abuse by Directors
How Coronavirus Support Abuse by Directors Raises a Wider Systemic Problem with Director Behaviour.
The Prodigy introduce their song “Their Law” noting “What we’re dealing with here is a total lack of respect for the law.” The song moves on to suggest that listeners should “F*ck em’ and their law.”
The band did not have directors’ duties in mind when they penned the song. The lyrics were aimed at the Criminal Justice and Public Order Act 1994. This statute prohibited, amongst other things, attendance at raves by the “Jilted Generation”, the subject of the group’s 1994 album title. Elsewhere Buford T. Justice, the sheriff from the “Smokey and the Bandit” films of the early 1980s, also used the phrase although he said “What we're dealing with here is a complete lack of respect for the law.” This was probably not a reflection on legal theory and the eventual withering of the law but a comment by the dogged Sheriff on the Bandit’s behaviour.
The Prodigy song and Buford T Justice’s catchphrase raise an interesting point which casts a light on how company directors are currently behaving in relation to the laws that they are supposed to live up to in England and Wales. Indeed, there seems to be evidence that a significant number of company directors have adopted an attitude of a total lack of respect for the law of directors’ duties. This law is contained variously in the Companies Act 2006, Insolvency Act 1986, Company Directors Disqualification Act 1986, and in a number of other statutes and case law. What evidence is there for this claim of a disregard of the law by directors?
Photograph by Hello I'm Nik on Unsplash.
A. The Evidence
(1) Bounce back loans - the biggest write-off in corporate history?
It is likely that the Government is going to have to undertake the biggest debt write off in corporate history in relation to the Bounce Back Loan Scheme (BBLS). Some £16 to £27 billion in bounce back loans is outstanding and whilst Government is taking welcome action to help stop the abuse being undertaken by company directors it still looks like £27 billion or so will have to be written off.
The write off comes from directors taking out loans with no intention of repaying them and the liberal lending practices which led banks to lend on very unusual grounds. In this way directors have abused the corporate form, defrauded the tax-payer, ridden rough shod over various company law provisions, and perhaps most importantly, behaved in a morally repugnant manner.
The banks have also heavily contributed with their over-reliance on the State backed guarantee system built into the BBLS and lent too generously. When default occurs, the banks can simply go to the State for recompense. This begs the question of exactly how responsible was some of the lending if £26 billion which now has to be written off? It is not an insignificant number by any measure. In context it equates to the Department for Education’s budget for four months or £2 billion more than the Department of Transport’s budget for one year. It is therefore a colossal sum which will be written off – the largest in corporate history in the UK. The banks may well respond and say that the Minister made them do it. But should that excuse wash? Should the banks not have provided a tempering influence to the Minister who was acting in a panic-stricken state of corona period overspending. Why were the usual lending standards dropped? Sensible lending measures should have been employed.
(2) Directors’ Disqualification
One consequence of BBLS abuse is directors’ disqualification. We have already seen evidence of this occurring with the Insolvency Service successfully pursuing the disqualification of a Birmingham based director who had used a number of companies to take out bounce back loans in a very dubious manner. Similarly, a group of companies based in Stoke has been wound up in the public interest following abuse of various coronavirus business support measures.
However, directors’ disqualification continues to exist generally outside the bounce back loan shambles. The law reports all too frequently carry stories of directors who have been disqualified for various periods of time depending on how “unfit” they have been. High profile cases such as Kids’ Company, Carillion and BHS continue to hit the news.
More recently, in addition to coronavirus loan support abuse we have also seen directors disqualified for 25 years for using false documentation, directors being disqualified for six years for dissipating £2.4 million of the company’s money before fleeing abroad, and a six year disqualification order for the director of a nursing home company who presided over the unauthorised removal of half a million pounds from the company’s accounts.
B. The Solution - what should be done?
As the preceding paragraphs demonstrate the Insolvency Service already do a sterling job in holding miscreant directors to account. But there is only so much they can do with limited budgets and time. Their resources must be increased, but we must also go further. What is needed is systemic behavioural change amongst directors who use the statutory privilege of the limited liability company. This change must focus on changing behaviour before the horse has bolted from the stable of good corporate governance and liquidity. We must address these issues of good stewardship before insolvency arises. We must also move away from the language of viewing the problem as simply affecting a small cadre of bad apple directors.
The Confederation of British Industry (CBI) and the Institute of Directors (IoD) need to lead on this behavioural change amongst company directors. Expensive courses on directors’ duties are not the way forward. Massive Online (free) Content (MOC) provision is. This should be free at the point of delivery and it should be provided as soon as possible. Companies House, the Insolvency Service, the CBI and the IoD all have a vested interest in getting such MOC materials in place. There are numerous models that can be adopted, such as these Insolvency Shorts videos series or some other accessible free online resource.
These governmental and quasi-regulatory organisations need to focus on raising awareness amongst directors of their statutory duties. If director behaviour does not change then more draconian steps may be needed. It is no longer good enough for the director class to remain ambivalent to their duties, at best, or to disregard them entirely as some seem to dramatically be doing. The limited liability form is a privilege. It must not be abused and the privilege should be withdrawn if it is.
We need to focus on director behaviour before problems arise. There is little evidence of this. Whilst this malaise continues it is unsurprising that directors exhibit a total lack of respect for the law. As it stands, the law is being permitted to wither away through lack of compliance. This is ironic perhaps for those who are not adhering to the law but who simultaneously take advantage of its benefits.
John Tribe has been been researching and writing about insolvency law - both corporate and personal - for 20 years, and is interested in the role and accountability of office-holders including company directors. He has been the editor of the Mithani Directors' Disqualification loose-leaf newsletter and continues to sit on the board of that authoritative publication. More recently he has written about the disqualification proceddings in Kids' Company and Carillion.
- Follow John on Twitter: @TribeBankruptcy