As the Insolvency Service gains new powers, company directors experiencing financial difficulties, particularly as a direct result of the pandemic will face increased scrutiny and pressure to dissolve their company legally, should dissolution be the best option.
Insolvency law is in place to ensure that directors of insolvent companies are held accountable for their conduct and do not profit from the demise of their company at the expense of creditors. Should the new bill come into force, then directors of dissolved companies will face increased risk of scrutiny from appointed Insolvency Practitioners, and potentially, the Insolvency Service.
Sanctions for directors may include:
Needless to say, for any director of a company in financial distress, these sanctions are major considerations for ensuring that the company is dissolved through formal insolvency proceedings. However, one of the key reasons for the new bill being pushed through parliament is that a minority of company directors found a loophole allowing them to benefit more from company dissolution.
Some directors may look at voluntarily striking-off a company as a less costly and much more attractive alternative to formal insolvency proceedings, allowing them to leave behind debts and liabilities without facing investigation and disqualifcation. Whilst there are certainly safeguards in place for the voluntary strike-off procedure, this is not to say that it can’t be misused, at the expense of creditors, consumers and company employees.
Presently, the Insolvency Service doesn’t have the power to investigate and disqualify directors of dissolved companies without first restoring the company to the Companies House register.
In contrast with voluntary strike-off, the proceedings for formal insolvency require a company director’s conduct to be investigated by an appointed Insolvency Practitioner, who reports to the Secretary of State. If a director is found to be guilty of misconduct, the Company Directors Disqualification Act 1986 (CDDA) gives the Insolvency Service the power to investigate fraudulent directors and apply to the court for disqualification of directors, and in some cases, for the directors to compensate creditors for the money owed.
The legal loophole for voluntary strike-off was first raised with the government in 2018, with the result being the intention to extend the current regime to include former directors of dissolved companies. As a result, the loophole would be closed, reducing the temptation for struggling directors to commit fraud rather than go through formal insolvency.
As a result of struggles brought on by the COVID-19 pandemic, the need for measures to come into place has become more pressing, with the conduct of a minority of fraudulent individuals directly amplified in recent months.
Whilst misconduct in dissolutions is rare, the concern that directors will dissolve their companies to avoid repayment of COVID support is backed up by figures - in the first quarter of 2021, almost 40,000 companies struck off the Companies House register; an increase of 743% compared to the same period last year. This figure reflects a large number of businesses shutting down in order to avoid repaying COVID-related financial support.
Contact Insolvency Practitioners
Should the proposed legislation be passed, various provisions of the CDDA will be extended to directors of dissolved companies. As a result, company directors are at a much higher risk of investigation and disqualification for fraudulent activity. it’s essential that company directors facing financial difficulties seek advice from licensed Insolvency Practitioners to ensure that in the case of company dissolution, it is carried out legally.
Call BEACON on 02380 651 441.