Directors of troubled companies struggling to repay COVID loans may be ‘sleepwalking’ into director disqualification if they don’t take the right advice at the right time.

The warning comes from Mike Pavitt, Council Member for the Southern and Thames Valley Region of R3, the UK’s insolvency and restructuring trade body.

He said: “COVID-related loan repayment difficulties have not gone away, especially with new tax burdens anticipated in the Spring, and nor, it seems, has the Insolvency Service’s appetite for pursuing director disqualifications linked to them."

“My main fear for directors who have just been doing their best to service legacy COVID-related debts in difficult circumstances is that they fail to seek the right advice early enough and sleepwalk into a disqualification."

Latest figures from the Insolvency Service (IS) show that in 2023/24, 68% of director disqualifications related to COVID loans, while the 2024/25 year to date is running at 76.5%, with the expectation of a total of 1,200 disqualifications this year.

If a director is disqualified, they may also be susceptible to a compensation order, even if they have already lost vast sums of money because they have been involved with an insolvent company.

Mike, also a former chairman of R3’s Southern & Thames Valley region, added: “Our analysis of the figures shows that the rate of disqualifications related to COVID loan abuse is higher than ever. Also, the average length of director disqualifications is going up significantly and is now 9.3 years, compared to 7.4 years only two years ago, an increase of 25.7%."

“These statistics support some of our members’ observations on the ground that the Insolvency Service has this year recommended a higher proportion of cases for disqualification action, notwithstanding that the directors involved may already have settled (without admission) any potential claims advanced against them in the name of the company or its liquidators."

“In the past, such evidence of willingness to compensate any disaffected creditors would often have tipped the scales when considering whether the public interest justified disqualification. Directors may perhaps be forgiven, therefore, for concluding that the Insolvency Service have somewhat shifted the goalposts, at least where COVID-related loans are involved."

“Businesses obviously welcome action being taken against directors who applied COVID-related loans toward an improper purpose. Such action potentially enhances compensation rates for creditors and acts a deterrent to similar misfeasant behaviour in future.”

However, Mike noted one has to bear in mind that many of the COVID-related loans were taken out with a self-certified application at a time when published guidance was confusing and when even a rudimentary eligibility check by the lenders would likely have revealed if an established company was ineligible, for example because they should have had published accounts which supported the stated turnover figure, but the accounts themselves did not.

He also felt it was highly unlikely that the Government would provide loans of the scale and type offered during the COVID pandemic in the future without additional checks and balances being involved.

Mike, Lead Corporate Restructuring & Insolvency Partner at law firm Paris Smith in Southampton, added: “The Insolvency Service are still pursuing and processing many cases centred around COVID-related loans."

“If you have a company which is heading towards insolvency and which is unlikely to be able to repay all of its COVID-related lending, you should avoid any temptation to simply dissolve the company or sell the business for a nominal amount to an unregulated company promising to manage the problem away, and instead seek legal advice from a qualified and regulated source.”

R3’s Southern & Thames Valley region includes Kent, Surrey, Sussex, Buckinghamshire, Oxfordshire, Hampshire, the Isle of Wight, Dorset, Wiltshire and Berkshire.