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The Government's Bounce Back Loan Scheme – is it all non-performing loans and fraud?

Posted on 8 July 2022

The Insolvency Service secures its first successful prosecution of a director for fraud on the Government's bounce back loan scheme.


The director of a pizza takeaway in Greater Manchester has become the first person to be successfully prosecuted for fraudulently claiming funds through the Government's COVID-19 bounce back loan scheme (BBLS).

The Insolvency Service has reported that company director, Abdulrazag Zagroba, applied for a loan of £20,000 two weeks after beginning the process of voluntarily dissolving the business of which he was the sole director. Zagroba failed to disclose to the bank that the company was in the process of being dissolved and signed the loan declaration which stated that the company would be able to make the loan repayments to Her Majesty's Treasury.

Zagroba, who used the loan money to purchase a personal car and gift money to friends and family, pleaded guilty to charges under the Companies Act 2006 and the Fraud Act 2006 and has been jailed for two years and disqualified from acting as a director for seven years.

Bounce Back Loan Scheme

The BBLS was announced by the Chancellor as part of the raft of COVID-19 support measures brought in to help businesses cope with cash flow issues in the wake of the pandemic and early UK lockdowns. The BBLS ran between April 2020 and 31 March 2021 and it is estimated that £46bn was loaned to struggling smaller businesses.

Under the BBLS, applicants could apply for loans of up to £50,000 and the repayment terms allow for a company to make no repayments in the first year and after that to repay the funds at a fixed rate of interest of 2.5% for up to a decade. The scheme was overseen by the British Business Bank (BBB) and the loans are 100% Government backed.

Vulnerabilities in the scheme – non-performing loans and fraud?

Vulnerabilities in the BBLS scheme have been known since its inception. In particular, the scheme was attacked by critics for failing to ensure sufficiently robust due diligence checks were in place prior to lending tax payer money to business owners.

From the outset, there has been concern that legitimate businesses would simply be unable to meet the obligation to repay loans with the result that HM Treasury would be left with millions (potentially billions) of pounds worth of non-performing loans on its books.

There has also been a concern that the scheme would be attacked by fraudsters who would take out loans and then take steps to evade the obligation to repay. The case of Mr Zagroba is a case in point; he caused his company to borrow money, dissipated the monies to himself and his family in the knowledge that he had already taken steps to dissolve his company prior to date on which the loan was due to be repaid.

Loopholes in the early days of the scheme, such as one that allowed multiple applications to be made to the various participating retail banks has not helped matters. Organised crime gangs recognised the opportunity to exploit this scheme and one assessment found that one gang alone had claimed £6m under the scheme using false identities. Given the ten-year repayment window for these loans, it is anticipated that further instances pf fraud on this scheme could be uncovered.

The BBB has estimated that between £15bn to £26bn (35 - 60%) of the funds loaned under the scheme could ultimately be lost because of either credit risk (borrowers being unable to repay their loans) or fraud and a subsequent BBB commissioned review estimated that around £4.9bn (11%) of loans approved were potentially fraudulent.

Insolvency Service Prosecutions

On 31 March 2022, the Insolvency Service published a fact sheet detailing the consequences of failing to repay loans made under the BBLS and what action it could take if misconduct was found. Examples of misconduct are:

  • providing false information on loan application;
  • using loan monies for personal benefit; and
  • voluntarily dissolving your company in order to avoid repaying the loan.

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 was enacted in December 2021 to deal with the issue of company directors deliberately dissolving companies that owed money to creditors, including a BBLS loan. The Act provides new powers for the Secretary of State to investigate directors (or shadow directors) accused of this behaviour.

The Insolvency Service can also apply for disqualification orders of up to 15 years and/or for an order that the director pay compensation to the company's creditors. These powers can be used retrospectively and up to three years after the dissolution of the company. In addition to prosecution under this Act, a criminal prosecution for fraud is also likely to be sought in these cases.

Mishcon de Reya LLP has a market leading team of insolvency lawyers and Criminal Defence lawyers who act for directors who are the subject of prosecution brought by the Insolvency Service under the Companies Act 2006 and the Fraud Act 2006. Our litigation team also acts for a wide variety of creditors seeking to recoup monies owed by under the terms of non-performing loan.

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