The Dissolved Companies Act – The Insolvency Service’s new powers to investigate directors of dissolved companies
The Insolvency Service has recently gained new powers to investigate directors of dissolved companies without having to restore said company, as was previously required.
With repayments for the government’s coronavirus business support loans falling due, The Insolvency Service’s new powers will also allow them to investigate directors of dissolved companies where they suspect Bounce Back Loan abuse or fraud.
Cracking down on debt-dodging directors dissolving their companies
Dissolution is a process for closing limited companies which are free of debt. However, some directors may choose to try and dissolve their companies as a way to write off those debts. In this process, creditors do have the right to object to the company being closed in this way, but often creditors are unaware of their rights or even unaware that their debtor is due to be dissolved.
Historically, The Insolvency Service has had powers to investigate live companies and those that enter insolvency processes – liquidation, administration, etc. However, they could only investigate a dissolved company’s affairs by restoring it at Companies House. It’s hoped this new legislation will reduce the time and expenses needed to investigate debt-dodging directors.
Recovering defrauded Covid support funds
Initially, The Insolvency Service’s new powers were intended to tackle the practice of ‘phoenixing’, wherein a director dissolves one company only to set up another one immediately afterwards without the old company’s debts. However, that soon took a backseat as the coronavirus pandemic developed and the government rolled out its various support schemes.
While this support, such as the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS), has proved a lifeline for many businesses that might otherwise have folded, as with any act of generosity, opportunists can take advantage. In this case, some directors have claimed bounce back loans of varying amounts through a limited company, only to dissolve it without repaying what they’ve borrowed or to misuse the funds.
With the passing of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act, the government hopes to tackle this issue. The legislation allows them to investigate directors of dissolved companies who might have committed misconduct. If any is found, the director could be disqualified for up to 15 years, be held personally liable for the company’s debts, or even prosecuted, depending on the offence’s severity.
When the powers came into force last December, Business Secretary Kwasi Kwarteng said:
“These new powers will curb those rogue directors who seek to avoid paying back their debts, including government loans provided to support businesses and save jobs. Government is committed to tackle those who seek to leave the British taxpayer out of pocket by abusing the covid financial support that has been so vital to businesses.”
Business Secretary Kwasi Kwarteng.
What can directors do if they can’t repay a bounce back loan?
If you’re a company director and have taken out a bounce back loan you can’t repay, while it may be tempting to try and dissolve an insolvent company, your creditors are highly likely to object to the strike off. Objection is even more likely if the company has HMRC debt or an unpaid Bounce Back Loan.
What can happen if you try dissolving a company with a bounce back loanFortunately, you do have other options before the creditors force the company into compulsory liquidation. If you can’t afford to repay your bounce back loan, it is an unsecured debt, so it can be included in several insolvency arrangements that, if you act early enough, could save your company.
So, what are your company’s options?
Repay the debt in affordable monthly instalments
If the company would be profitable without the burdensome debts and it could afford to repay a portion on a monthly basis, it may be suitable for a Company Voluntary Arrangement (CVA).
- Formal repayment arrangements where the insolvent company pays an affordable portion of its debt each month, usually over a period of five years.
- Once the arrangement concludes, all the remaining unsecured debt is written off.
Restructure the company via administration
Sometimes, repayment isn’t the best course of action, and the company may benefit more from restructuring. In which case, you can explore administration as a recovery option.
- The process involves one of our licensed insolvency practitioners taking control of the company.
- The administrator investigates the company’s financial situation and creates a plan to restructure the business and what to do with its assets.
- The process pauses creditor pressure and means creditors may get a better result than if they were to pursue further debt recovery action.
Close the company via a voluntary liquidation
You can still liquidate a company with a bounce back loan via a Creditors Voluntary Liquidation (CVL).
- A CVL is used if there’s little chance of repaying the company’s debts and closure would be a better option than attempting to continue trading.
- The company closes in an orderly manner, drawing a line under the debts.
- Once the process is complete and if no evidence of wrongdoing is found, the directors can start a new limited company and continue the business should they wish to.
- Crucially, unlike dissolution, the creditors do not have the right to object, though are invited to participate in the process of appointing a Liquidator.
Summary
The Insolvency Service’s new powers allow them to investigate directors of dissolved companies without having to restore the company at Companies House. Initially intended to tackle the practice of ‘phoenixing’; directors closing an insolvent company only to set up a new one without the debts immediately afterwards, it gained a new purpose once the government set up its coronavirus support schemes.
The Insolvency Service will use these powers to investigate directors who’ve attempted to dissolve companies without repaying their government-funded coronavirus support loans. If you’re unable to repay your company’s bounce back loan, as it is an unsecured debt, it could be included in a formal insolvency arrangement overseen by a licensed insolvency practitioner. Undergoing one of these procedures means your creditors are likely to see a more substantial return than if they were to force the company to close through compulsory liquidation.