CBILS fraud fears as business strike-offs surge in 2021

Concerns highlight businesses taking out CBILS/BBLS loans then disappearing and that some banks have already started to have defunct borrowers reinstated.

The number of companies closing down after being struck off the Companies House register increased by 743% in the first quarter of 2021 compared to the same period in 2020, backing up fears of a wave of CBILS and BBLS loan fraud.

Strike-offs from Companies House increased to 39,601 in the first three months of 2021 compared to just 4,695 in the same period in 2020.

To be ‘struck off’ a company cannot have traded or sold any stock in the previous three months. While many legitimate businesses will have closed their doors due to the pandemic, there are thought to be many instances of companies shutting down purely to avoid CBILS and BBLS repayments.

Pandemic pressures and government loans

The pressures of the pandemic combined with the speed of the CBILS and BBLS rollout meant that many of the standard underwriting checks were not carried out before lenders wrote these loans. BBLS, which provided up to £50,000 in loans to assist the smallest businesses through lockdown, are thought to have been the most open to abuse.

Data shows that 80% of BBL applications were granted, with the overwhelming majority going to micro-businesses – those with 10 employees or fewer. Estimates by the OBR suggest that as much as £22bn in BBLS lending alone will be lost to defaults and fraud. In addition to individual instances of fraud, experts say there is likely to be significant organised crime involvement.

While the Government has ultimately pledged to guarantee almost all of the value of pandemic-related loans (80% in the case of CBILS and 100% for BBLS), lenders are likely to have to exhaust their recovery options before turning to the Treasury for compensation on defaulted loans.

Bank position

Some lenders who suspect strike-offs have occurred to avoid CBILS and BBLS repayment have already begun applying to have these companies reinstated by Companies House in order to pursue debt recovery. Fraud experts are already at work attempting to identify companies that have been dormant since receiving a coronavirus loan. Where loans were backed by personal guarantees by the company’s directors, lenders will be able to pursue these individuals directly.

Even though some level of fraud was anticipated with CBILS and BBLS, these strike-off numbers suggest that the worst-case scenario might be in play for some lenders.

With the Government unlikely to pay out to lenders who cannot prove they have actively pursued all the available debt recovery options, banks are now gearing up to identify the potentially thousands of loans on their books likely to default. They need to have a strategy in place to pursue debtors, either through insolvency or by enforcing personal guarantees.

Our response

Many of these loans will have gone to legitimate businesses that have not survived the past year. When it comes to those who were less honest, the task of pursuing bad debtors who never intended to pay these loans back will be costly and time-consuming without the right tools.

But, it is reassuring to see that the Government is alive to this fraud and proposing to enhance the powers granted to the Insolvency Service to enable it to investigate and disqualify the directors of dissolved companies.  The Ratings (Coronavirus) and Directors Qualification (Dissolved Companies) Bill had its second reading in the House of Commons on 16 June and is expected to be enacted into law before the end of the Summer.

Radar, the predictive data analytics and research tool from Mazars, allows lenders to monitor their loan books for early signs of financial stress and to receive notifications when a Company has issued a notice to strike off, giving them the opportunity to intervene and block the strike off and to recover debts before a business is closed.

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