The legislative changes mean that directors of any dissolved company, in addition to those whose companies have entered liquidation or administration, could now be investigated and face potential disqualification.
So, how should the new powers be applied and what should directors do to stay on the right side of the new rules?
Whereas previously, the Insolvency Service had powers to investigate businesses that had entered an insolvency process, including administration and liquidation, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 extends those powers to the directors of dissolved companies.
In effect, the Act will close a gap in the legislation, which had allowed directors to dissolve their companies without any investigation of potential misconduct.
For example, sometimes directors seek to dissolve a company with significant debts in order to avoid liability, and at the same time begin trading in a new company, with the benefit of the previous company’s assets. This has the effect of the assets, which should have been available to the previous company’s creditors, being put beyond the reach of those creditors.
Bounce back loan fraud
Following the pandemic, the government is particularly concerned that companies that received the benefit of government-backed Covid support loans may be dissolved without the loans being repaid, leaving it to the taxpayer to pick up the expense.
There have been many stories of company directors purchasing expensive cars from the proceeds of bounce back loans, through to large-scale money laundering, with multiple applications made by the same people on behalf of non-trading companies.
While in the past, it was possible to investigate the directors of dissolved companies, this first required the company to be restored to the register, which involved a significant delay and cost. As such, the new rules make it easier for the Insolvency Service to tackle fraud.
Targeting rogue directors
Alongside the existing investigations into insolvent companies, they have the potential to strengthen the UK insolvency regime. They should provide people with the confidence to do business here, safe in the knowledge that rogue directors can be prevented from abusing the privilege of limited liability.
Under the new rules, any director of a company which has been dissolved in the last three years may be subject to an investigation. Where a director has tried to hide their actions by dissolving the company, they risk disqualification from acting as a director of a limited company for two to 15 years. They may also have to pay compensation to creditors.
It’s important that the UK remains an attractive place for business and it would be a disaster for the economy if the number of small businesses reduced significantly. To prevent this scenario, there’s a need to continually incentivise entrepreneurs to start new businesses and realise the benefits of limited liability.
However, there must also be a suitable insolvency regime in place, which deals with failed companies. The government is keen to ensure that where a company is unable to pay its debts, the dissolution process is not used as an alternative to a formal insolvency procedure.
The regime must also provide a fresh start to entrepreneurs who happen to have been unfortunate with regards to their business’ financial performance but have not been fraudulent. While it’s vital that directors who have been playing the system by avoiding paying creditors are stopped, decision makers who act with integrity and fulfil their duties should not be left feeling fearful of starting a new company.
It's also worth bearing in mind that the Insolvency Service has limited resources and not all cases of dissolved companies can or should be investigated.
Directors need to be clearly aware of their duties and take advice from a professional if they are unsure. They should also remember that they act as agents of their company so all decisions should be taken in the best interests of the business and its creditors.
In every scenario, they therefore need to separate their position as a director from their personal position. It is common for directors to have a loan account with the company, or to have personally guaranteed company debts. This can lead to a conflict of interests, and directors can be tempted to put their own personal interests before those of the company.
In particular, where a company cannot repay its debts, directors should consult a professional and consider formal insolvency routes if rescue of the company is not possible. In the event that a company becomes insolvent, it is especially important that directors consider the interests of the creditors and take every possible step to avoid worsening their position.
As the Insolvency Service often relies on complaints in order to identify targets for investigation, people aware of companies misusing the dissolution process should inform the Insolvency Service via its website.
The Insolvency Service’s new powers are a positive step forward, addressing a loophole in previous legislation and helping to tackle unscrupulous company directors who misuse the dissolution process.
By continuing to promote the benefits of limited liability companies and emphasising that directors who act with integrity have nothing to fear, the new rules can be expected to strengthen the UK’s insolvency regime while protecting any negative impacts on the economy.
