The Insolvency Service has recently been given new powers to investigate directors of companies that have been dissolved.
Previously, the Insolvency Service in the UK has only had powers to investigate directors of live companies or those entering a form of insolvency.
However, the new ‘Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill’ aims to prevent directors from dissolving their companies to avoid creditors.
Read on to find out how the bill works, what happens if a director is found to act unfairly, and alternative options to dissolution should you wish to close down your business…
Why these new measures have been brought in
The introduction of the new bill is the result of government concerns that some company directors are dissolving their businesses as a way to avoid repaying government backed loans, such as Bounce Back Loans, that were given to support them during the COVID-19 pandemic.
Of course, dissolution is inevitable in some cases, but it should really only be used in the correct circumstances.
By giving the Insolvency Service in the UK powers to investigate directors of companies that have been dissolved, the hope is that legal loopholes are closed, and directors will be deferred from misusing the dissolution process.
How it works
Directors who liquidated their business properly have nothing to worry about. Rather, it’s those who have knowingly used the system to their advantage who should be concerned – and with over 415,000 company dissolutions having taken place in 2020 alone, there are a lot of potential cases to be investigated.
The rules essentially aim to prevent directors of dissolved companies from ‘phoenixing,’ which is when they set up a near-identical business once their existing company has been dissolved, which often leaves customers and creditors unpaid.
The measures included in the bill also enable the Insolvency Service to tackle directors who have inappropriately wound up companies which have benefitted from Bounce Back Loans, and include sanctions such as disqualification from acting as a company director for up to 15 years.
According to Business Secretary Kwasi Kwarteng, the introduction of the bill is to ‘restore business confidence and people’s confidence in business’ as the UK builds back up from the pandemic.
What happens if a director is found to act unfairly?
According to the Company Directors Disqualification Act 1986 (CDDA), a director can be disqualified for a number of reasons, including wrongful trading, fraudulent trading, or ‘unfit’ conduct. The key points the directors can be banned on are as follows:
- Continuing to trade when you know the company is insolvent.
- Continuing to take credit when there was no reasonable prospect of creditors being paid.
- Failing to keep proper accounting records.
- Failure to pay company tax liabilities.
- Not filing accounts and returns at Companies House.
- Using company funds or assets to your own benefit.
- Failure to respond to or comply with an IP/liquidator’s needs.
- Misrepresentation of facts about the company.
For more information about wrongful and fraudulent trading, don’t miss this blog.
So, what are the alternative options to dissolution?
The main aim of the new bill is to force directors to look at their liquidation options closely and choose proper methods to end their business rather than taking their chances with a dissolution. If you have decided to close your company, there are two main alternatives to dissolution:
This is a way to formally close a solvent company and are commonly used in instances where directors are retiring, groups are restructuring or when a company has no further purpose.
Alternatively, if your business must close its doors and your assets must be sold to pay your creditors, a creditors’ voluntary liquidation is a way to tie up loose ends and close your business in a managed way.
How McAlister & Co can help
If you are thinking about closing your company but are unsure about which route is right for you, or if you have further queries about the role of the Insolvency Service in the UK, our friendly team will be more than happy to answer all of your questions.
As expert insolvency practitioners with over 20 years of experience, we can provide advice on all the solutions available.
So, if you want to take the hassle out of the process of closing down your business and want to make sure everything runs as smoothly as possible, speak to us about the best course of action today.