Michael Reid: The benefit of a liquidator in the fight against fraud

Michael Reid: The benefit of a liquidator in the fight against fraud

Michael Reid

Michael Reid, managing partner at Meston Reid & Co, discusses the role of liquidators in the fight against fraud.

It is often said that challenging economic conditions create financial uncertainty and result in an increase in fraudulent activity by the unscrupulous.

For example, the Covid-19 pandemic caused significant financial upheaval for almost everyone and many reports of fraud were publicised.

One might point to the incidence of furlough fraud, which occurred when an employer claimed furlough support from the Government despite the fact that an employee was continuing to work and generate an economic return for such employer.

Various estimates suggested that up to 9.6 million workers benefitted from the furlough scheme. A welcome support mechanism for many, but not the subsequent estimate from HMRC that at least 30,000 companies had made fraudulent claims.

How were these false claim monies utilised/abused? We may never know.

Further, a Parliamentary report in 2021 suggested that nearly 40% of bounce-back loans totalling £17 billion would never be repaid, with another £5bn being lost due to fraud and error.

We are beginning to see the results of reviews by regulatory bodies which reveal that many company directors inflated annual turnover in order to claim a bounce-back loan to which the company was not entitled, only to remove the cash from the company for personal purposes as soon as it was provided, sometimes not long before the company collapses into insolvency.

We should remember that it is the taxpayer who is picking up the tab for all of the money provided in these schemes which will never be recovered.

A briefing paper issued by the Association of Business Recovery Professionals ‘R3’ reported a 41% increase in fraud since 2019. The report also estimated that 64% of businesses were affected by either fraud or corruption.

Further, there was a 422% increase in fraudulent applications for grants, insurance fraud jumped by 135%, and that an estimated 40% of all crime committed across the UK is linked to fraud. When you work hard for money, it is always frustrating when some people defraud the system.

In the fight against crime, it is not unreasonable to ask if a liquidator has a role to help recover monies either for the Government or the general body of creditors of a company which has collapsed after the directors have disappeared with all the money?

One of the challenges in detecting fraud is the ability to obtain documents that support an allegation. Of course, if a company is in liquidation, the liquidator has authority to locate, secure and review the company’s accounting records e.g. bank statements, cash book, invoices etc.

This provides a quick and effective route to help determine what has happened rather than embark upon a time-consuming court process to try to recover documents for examination.

Further, a liquidator has legal authority to interview directors either informally or before a sheriff and, of course, report the conduct of directors to the Director Disqualification Unit. It is not uncommon for a large creditor, often HMRC, to help fund a liquidator’s investigations on the basis that recovery of monies, which will ultimately benefit the taxpayer, is expedited and directors brought to justice.

As some may recall, the law was changed recently in order to allow a company which has been struck off to be restored to the register of companies and thereby thwart the actions of a rogue director who defrauds a company and seeks to have it dissolved before anybody notices.

Some of the more robust suggestions from media commentators suggest that directors should be made liable for certain company debts in the event of a company falling into liquidation.

This is perhaps unduly harsh because, for example, a company may fail through no fault of the directors e.g. the largest customer goes bust and cannot pay a large debt, there is a change in legislation, or the company itself is subject to fraudulent activity.

The R3 report introduces the concept of automatic disqualification for any director (whether or not liquidation incepts) if the company fails to file statutory accounts with the registrar of companies on time two years in a row. Again, this might be unfair depending upon the reasons for late filing of accounts but it certainly points to a general consensus that directors require to act responsibly.

When one thinks that a director of a UK company does not need any prior qualification other than being at least sixteen years of age, it is easy to understand why some unscrupulous individuals can use a corporate entity to defraud others.

The role of a liquidator helps to speed up the process of obtaining documents, liaising with regulatory bodies and instigating legal action which may well result in a better financial return to the general body of creditors.

Using a liquidator and the powers provided under the Insolvency Act 1986 can provide a significant deterrent to fraudsters if they know that a liquidator might be on their tail with the many investigatory powers provided by law.

Michael Reid is managing partner at Meston Reid & Co.

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