The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill had its First Reading in Parliament last week.

If enacted, the Insolvency Service will be given powers to investigate directors of companies that have been dissolved, closing a legal loophole that allows companies to avoid repaying creditors, like HMRC.

At present only live companies, or those that enter a formal insolvency process, can be investigated for fraudulent trading. However, dissolving a company through a strike-off process isn’t classed as formal insolvency, meaning directors can avoid investigation if they can close their company this way.

While it’s actually designed for companies that haven’t been trading for the previous three months not threatened with insolvency procedures, some directors have been using strike-off as an alternative to formal liquidation.

If the new laws are passed, directors will be presented from dissolving companies with active liabilities, and, crucially, the act will be applied retrospectively, meaning the Insolvency Service will have the power to investigate companies already dissolved that have government-backed loans – like Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loans still outstanding.

Consequences for directors

At present, if a director is investigated and malpractice is found, they face sanctions that include banning them from being a director of any company registered in the UK, or any overseas company with connections with the UK, or being involved in forming, marketing, or running a company. They also would not be able to:

• sit on the board of a charity, school or police authority
• be a pension trustee
• be a registered social landlord
• sit on a health board or social care body
• be a solicitor, barrister or accountant

Prison sentences are given if the terms of disqualification are broken, and even others can be prosecuted and become personally liable for a company’s debts if they carry out company business on the instructions of someone who is disqualified.

If The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill is passed, certain provisions of the Company Directors Disqualification Act 1986 will also be amended. These include:

• Extension of the disqualification of unfit directors of insolvent companies to also include former directors
• Allowing the Secretary of State or official receiver to request information or documentation from anyone about the conduct of a former director of a dissolved company
• Allowing compensation claims to be brought in circumstances where the conduct of a former director of a dissolved company has led to creditors incurring losses.#

Why now?

£45bn has been paid to UK businesses through the Bounce Back Loan Scheme alone, so closing these loopholes now is critical if Government is to recoup the costs of supporting businesses through the pandemic.

Back in October, the National Audit Office was predicting that up to £26bn could be lost due to fraudulent use of the Bounce Back Loan scheme, which the Public Accounts Committee has called ‘the government’s largest and most risky business support scheme’.

Bounce Back Loans launched in May 2020 and the initial terms meant that no repayments needed to be made in the first 12 months, during which the Government said they would also cover fees and interests for the borrower. This meant that the first loans were due to start being repaid this May, however in February this period was extended to 18 months.

Once repayment is due to begin, businesses have the option to ‘Pay as You Grow’, which enables borrowers to extend the length of their loans from six to ten years or to make interest-only payments for a further six months.

Clearly, the fear is that some are seeing company dissolution as an effective way to avoid these repayments altogether.

Other options

These are, of course, several legitimate options for closing a business with creditors that don’t involve fraudulent measures.

Liquidation and sale of assets attempts to recoup some funds to compensate creditors, while Company Voluntary Arrangements allow the repayment of creditors to take place over an agreed period of time while trading continues.

Get in touch with the MPA team for advice on exit strategies or to explore funding routes to boost your post-pandemic recovery.