Overstating Turnover For A Bounce Back Loan Results In 8 Year Director Disqualification But No Compensation Order 

In the matter of The Secretary of State for Business And Trade v Minto-St.Aimie [2024] EWHC 3137 (Ch) a director, Mr Minto-St.Aimie (“Mr Minto”) was disqualified for 8 years. Notably notwithstanding that he was acting as a litigant in person the Court refused to issue a Director Disqualification Compensation Order.

A director agreeing to cease acting as a director due to an undertaking is commonplace, nevertheless director disqualification proceedings that go all the way to trial are a relatively rare event. Mr Minto took the matter to trial. The Secretary of State sought a disqualification order of 10 years but Mr Minto shaved 2 years off.

The Secretary of State for Business and Trade sought an order under Section 6 of the Company Directors Disqualification Act 1986 and Section 15A of the Company Directors Disqualification Act 1986.

The basis of the application by the Secretary of State was all rooted in what turnover you need for a bounce back loan.

The company Mr Minto was running, St.Aimie’s Sports Academy Community Interest Company (“the Company”) went into Creditors Voluntary Liquidation on 12 January 2022. The statement of affairs dated 5 January 2022 showed its main creditor to be Barclays Bank Plc.

Bounce Back Loan Application On Turnover

The Company’s accounts for the year ended 30 December 2019 showed a turnover of £41,830. 

In May 2020 the Company applied for a bounce back loan.

The level of the loan permitted on a bounce back loan application was restricted by its turnover to no more than 25% of turnover for the calendar year 2019.

The problem for Mr Minto was that the maximum application he could make for the Company for a bounce back loan was £10,457, not the £25,000 that he sought having stated on the application form the Company’s turnover was £100,000.

Use Of The Bounce Back Loan

It was apparent fron the Court’s judgment that Mr Minto used the bounce back loan not only to cover some arrears of wages but also to receive a loan from the Company.

Filling In The Bounce Back Loan Application

A point of contention was that Mr Minto suggested the Company’s accountant assisted him with the completion of the bounce back loan application, telling him what to write. This was disputed by the accountant and the Court did not find that it was completed in this way.

An issue was the fact that the Company’s bank statements showed receipts which were its income and the ability to ensure that the turnover was reasonably accurate would not appear to have been too troublesome as noted by the following findings made by the Court:

… It would have been easy for him to check the figure by adding up the income shown in the Company’s bank statements. The disparity between the claimed turnover and the actual turnover is so significant that it is not consistent with a genuine but mistaken estimate; nor can it even be classified as reckless. At the time of the BBL application, Mr Minto-St.Aimie would have been well aware of the Company’s limited financial resources, with its lack of recent income contributing to his wages not having been paid for several months. He must have known that the Company had not turned over £100,000 or anything like it in 2019.

I am therefore satisfied that Mr Minto-St.Aimie knowingly provided false information on the BBL form when he overstated the Company’s turnover. I am also satisfied that Mr Minto-St.Aimie thereby caused the Company to breach the terms of the BBL scheme by making an application which exceeded the Company’s entitlement.

… Accordingly, I find that the ground that Mr Minto-St.Aimie caused the Company to receive £14,543 more than its entitlement is made out.

Special Aspects To Bounce Back Loans

The Court highlighted the special aspects of the bounce back loan scheme and why such misconduct is taken so seriously:

The reference to trust and confidence being placed in company directors is a corollary of the self-certification application process for BBLs. As described above, BBLs were unusual in that although the lending was provided by financial institutions such as banks, the government guarantee meant that no credit checks or other verification processes were required in order to protect the primary lenders. The whole process was streamlined, with speedy payments being provided to borrowers. The faster the process, the fewer the checks, and the greater the risk that loans would ultimately not be repaid, whether through the effects of the pandemic, ordinary commercial misfortune, overstatement of turnover, or outright fraud. This risk was entirely assumed by the government.

It is important to note that BBLs did not involve businesses being offered “free money” with no strings attached and no questions asked. The strings included that the loans were repayable according to their terms, albeit that those terms were generous and limited liability would restrict recovery against company borrowers if there was an eventual default. Questions were also asked, in the BBL application form; but it appears that the answers to those questions were not subjected to the usual level of scrutiny that would apply if there had been no government guarantee in place. The whole point of the scheme was that the answers to such questions were not rigorously scrutinised, to prevent delays in getting funds to companies in need. Looked at as a whole, the effect of limited liability and the government guarantee was to place great weight on a company director giving truthful answers to the eligibility questions asked in a BBL application. Truthful answers were the only effective safety mechanism, and government money was being staked on those answers. I entirely agree, therefore, with Chief ICC Judge Briggs’ description of the trust and confidence which was placed by the government on company directors in relation to the BBL scheme.

Purpose Of Director Disqualification Compensation Orders

The purpose of director disqualification compensation orders was said to be:

The intention behind the compensation regime is to protect victims of wrongdoing who are not adequately compensated through the insolvency process, and to help remove the perception that wrongdoers are not held to account, improving confidence in the insolvency regime (Pure Zanzibar at paragraphs 25 and 26). In Noble Vintners, ICC Judge Prentis described the intention in this way:

“So the intention was to enhance in the public interest the protective aspect of the disqualification regime by giving monetary remedies to creditors financially affected by the misconduct, thereby giving the regime as a whole more ‘bite’, actual and perceived; and also to fill gaps in the exploitation of IA86 remedies…”

It is perhaps interesting to note that it was pointed out by the judge that notwithstanding the director disqualification compensation orders regime was introduced 8 years ago there were only 2 prior reported decisions:

…which points towards the power being invoked sparingly by the SoS

Considerations For Compensation Order

The Court highlighted the following key general considerations for a compensation order to be made whilst it is clear it is a matter of discretion:

• Impecuniosity which does not fetter discretion
• Double recovery
• Oppression by adding to the punishment of disqualification
• Public interest in the insolvency regime and stopping directors “getting away with it”
• Not an automatic sanction
• Adverse costs suffered by a disqualified director
• Veil of incorporation in limited liability companies

As far as Mr Minto is concerned it declined the Secretary of State’s invitation to order compensation:

… I do not take into account as justification for the compensation order that Mr Minto-St.Aimie benefitted personally at Barclays’ expense. This might seem somewhat artificial, given that I have concluded that insofar as it is relevant to mitigation, Mr Minto-St.Aimie cannot say he did not personally benefit (because he did). Reaching that conclusion did not involve unfairness to Mr Minto-St.Aimie. It would involve unfairness, though, to treat Mr Minto-St.Aimie’s personal benefit as additional misconduct and to take it into account in deciding whether to make a compensation order. If that allegation had been put in the SoS’s affidavit, Mr Minto-St.Aimie would have had to defend it and might have raised arguments which he did not think to raise when the point was merely relevant to mitigation. He might have said, for example, that although he was the payee shown in the Company’s bank statements, he spent the money in a way which benefitted the Company. There was no evidence about this because it was not part of the SoS’s case. Taking an allegation which was not part of the SoS’s case into account in determining whether to make a compensation order would in my judgment be as unfair as doing so in making the decision on unfitness and calculating the primary period for disqualification.

This may well be an important point in future cases, particularly those involving BBLs. It seems to me that a director whose misconduct involves not only taking out an excessive loan but also taking the money for himself is a much more likely target for a compensation order than one who simply takes out an excessive loan. One purpose of a compensation order is to prevent a sense that directors are “getting away with it”. If there is a sense that directors are “getting away with” creditors’ money, then the SoS will need to establish that as part of the misconduct in the CDDA proceedings. The same point could be made about allegations of dishonesty.

… I also take into account that Mr Minto-St.Aimie has made a personal financial contribution to the costs of the liquidation, and has purchased an asset from the Company (in cash). Overall, he has contributed £3,540, which is not an insignificant proportion of the compensation order sought against him.

I also take into account the nature of the misconduct, and the sanction which will already be imposed. I have found that this was serious, and overall required a period of disqualification of eight years. That finding and the sanction imposed mark the court’s disapproval of Mr Minto-St.Aimie’s misconduct. The likelihood that Mr Minto-St.Aimie will be ordered to pay the costs of these proceedings will add to the overall detriment he will suffer, and there will be limited scope for it to be said that Mr Minto-St.Aimie is being let off.