I am pretty sure that the garage did not have any Insurance in force for the courtesy car and have made up the story of the the Insurance policy being cancelled. If you checked with DVLA, I suspect they will confirm no Insurance was registered at the time of the accident.
As far as I understand the Commercial Traders policies, they have to inform the Insurers of the car registrations they are looking to have Insured. The policies are updated, as cars are sold and new cars bought.
Your Son could go to the Police to advise them that the garage has provided a courtesy car that was not Insured. The problem is that your Son should have checked that he was correctly Insured, before he drove the car. So although the garage may be in hot water, so will your Son.
Did the garage inform your Son the courtesy car was Insured BEFORE he drove it away ? Or did he just assume that a garage would never provide a courtesy car with no Insurance ?
Why did your Son, have to buy the courtesy car ? What legal obligation did your Son have to buy the car ?
Your Son has been totally stitched up here and he should have obtained advice straight away. By taking actions which were not in his best interests, has ended him in a very difficult position. It is now trying to dig his way out of it, which is not going to be easy.