The client instructed Samuel Okoronkwo Jr. in relation to an investigation being conducted by The Insolvency Service following the liquidation of a construction company.
The company operated within the construction sector, providing cladding and related external and internal construction services. The company entered liquidation in August 2021 after experiencing financial difficulties arising from a reduction in contracts, cancellations and difficulties maintaining trading operations.
The company obtained a Bounce Back Loan of £50,000 in June 2020. Following the company’s liquidation, The Insolvency Service commenced enquiries concerning the circumstances surrounding the loan application, the information provided within the application and the use of the loan funds.
The investigation focused on whether the company had accurately declared its turnover when applying for the loan and whether the company was entitled to obtain the maximum available amount. The Insolvency Service raised concerns regarding a potential discrepancy between the company’s actual turnover and the projected turnover figure used within the application.
The client’s accountant explained that the turnover figure had been based on projected accounts, as the company’s accounting period had not concluded at the time of the application. The accountant advised that further review of the company records would be required to confirm the financial position at the date of the application.
A further concern raised by The Insolvency Service related to the payment of approximately £47,700 from the Bounce Back Loan funds to the company’s accountant. The Insolvency Service questioned whether the payment represented legitimate business expenditure or whether the funds had been used to settle existing liabilities rather than providing working capital to support the company.
The accountant’s position was that the payment related to professional services provided over approximately one year, including bookkeeping, consultancy, business planning, financial projections and other advisory services. The accountant confirmed that supporting invoices and records were available to evidence the work undertaken.
The company employed a small number of staff and undertook work both directly for customers and through subcontracting arrangements. The company did not operate from dedicated business premises and the director used personal transport for business purposes.
The client explained that financial difficulties arose due to a lack of contracts and the inability to continue operating profitably. Professional advice was sought shortly before the company entered liquidation.
The Insolvency Service advised that the investigation would consider whether there had been any breaches of the director’s duties, including whether the director had traded improperly, failed to maintain proper records, provided inaccurate information or misused company funds.
The principal issue was whether the company had provided accurate information when applying for the Bounce Back Loan and whether the turnover figure used to calculate the loan amount represented a genuine and reasonable projection.
Counsel considered whether the client could demonstrate that the loan application was completed based on information reasonably available at the time and whether there was evidence supporting the projected turnover figure.
A further issue concerned the use of the Bounce Back Loan funds, particularly the payment made to the company’s accountant. Counsel considered whether the payment could be justified by reference to genuine professional services provided and whether sufficient evidence existed to demonstrate that the fees were proportionate and commercially reasonable.
Counsel also considered the potential allegations that the loan funds had been used for purposes outside the intended scope of the Bounce Back Loan scheme. The Insolvency Service’s concern was that the funds may have been used to discharge an existing liability rather than supporting the continuation of the business.
A further issue concerned the conduct of the director prior to liquidation, including whether the director continued trading when the company was experiencing financial difficulties and whether appropriate professional advice was obtained at the relevant time.
Counsel considered the potential consequences of an adverse finding, including director disqualification proceedings, recovery action in relation to alleged misuse of funds and possible further action in circumstances where inaccurate information had been provided.
Counsel advised that the immediate priority was to obtain and review all relevant financial documentation to properly respond to the concerns raised by The Insolvency Service.
Counsel advised that evidence should be prepared addressing the basis upon which the Bounce Back Loan application was completed, including the turnover calculations, projections relied upon and information available at the time of submission.
In relation to the payment made to the accountant, Counsel advised that detailed supporting evidence would be required, including invoices, descriptions of work undertaken, correspondence and records demonstrating that the services provided were genuine and proportionate to the company’s requirements.
Counsel advised that the client should provide a clear explanation regarding the company’s financial position, the circumstances leading to liquidation and the steps taken to seek professional advice once difficulties arose.
Counsel advised that the risks arising from the investigation were significant, including the possibility of director disqualification proceedings and potential recovery action if The Insolvency Service concluded that the Bounce Back Loan had been obtained improperly or misused.
Counsel recommended that further time be requested from The Insolvency Service to allow proper preparation of a response and consideration of the supporting evidence before any formal submissions were made.
Counsel further advised that once the relevant documentation had been reviewed, a detailed response should be prepared addressing each allegation raised by The Insolvency Service and providing evidence demonstrating the legitimacy of the loan application and use of funds.
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