New powers given to the Insolvency Service to investigate directors of dissolved companies

The insolvency service under new legislation proposed on 12 May 2021, will have the power to investigate company directors of dissolved businesses, closing the legal loophole, and stop directors from leaving staff or taxpayers out of pocket.

This legislative move by the Insolvency Service, on behalf of the Business Secretary, will stop directors from fraudulently avoiding repayment of Government backed loans, that were given to support businesses during the Coronavirus pandemic.

Legal powers have been extended to include the relevant disqualification sanctions preventing directors from acting as a company director for up to 15 years further to their disqualification.

These measures will also act as a deterrent to directors of dissolved companies, who look to set up a near identical business after dissolution, with view to leaving creditors and suppliers, including HMRC and other customers unpaid.

Currently the Insolvency Service have the powers to investigate directors of live companies, or those entering insolvency and where malpractice or wrongdoing is found, directors can face sanctions and a company director ban of up to 15 years.

The main point to be noted, is that the proposed measures including the Ratings (Coronavirus) and Director Disqualification (Dissolved Companies) Bill, covering England, Scotland, Wales and Northern Ireland, will apply retrospectively to dissolved companies and aims to tackle directors who are looking to avoid their responsibilities under the CBILS & Bounce Back Loan Scheme.

As the Secretary of State for Business, Kwasi Kwarteng stated:

“…we need to restore business confidence, but also people’s confidence in business – which is why we will not hesitate to disqualify directors who deliberately leave employees and the British taxpayer out of pocket…..Extended powers to investigate directors of dissolved companies means those who have previously been able to avoid their responsibilities will be held to account.”

However, the Director of Policy and Corporate Governance at the Institute of Directors, Dr Roger Barker also reiterated that:

“…Although corporate dissolution may be inevitable in some cases, it should only be used as a last resort – after all other realistic avenues for protecting the interests of stakeholders have been exhausted. Using company dissolution as a mechanism for the evasion of a directors’ duties has no place in the governance of a responsible enterprise.”

The message is clear that dissolution for evasion purposes will not be tolerated. Albeit the government support of £1.5 billion given to sectors who have suffered an economical backlash due to the pandemic, ensuring businesses in England can stay afloat and allowing business rate appeals on a ‘material changes in circumstances’ basis, may have resulted in taxpayer support going to businesses who could have operated normally, disproportionately benefitting regions such as London.

Further information about the disqualification of directors can be found here.

Should you wish to discuss your personal situation or corporate structure, or would like advice with any other business matter, contact GE partner and expert, Joanna Loizidou, who can assist you to meet your business objectives or help you navigate through the impact of the Coronavirus pandemic, moving your business back into growth.