Under new legislation, the Insolvency Service will be given powers to investigate directors of companies that have been dissolved, closing a legal loophole and acting as a deterrent against the misuse of the dissolution process.
The process will no longer be able to be used as a method of fraudulently avoiding repayment of government-backed loans given to businesses to support them during the coronavirus pandemic
Extension of the power to investigate also includes sanctions such as disqualification from acting as a company director for up to 15 years.
Business Secretary Kwasi Kwarteng said: “We are determined that the UK should be the best place in the world to do business. Extending powers to investigate directors of dissolved companies means those who have previously been able to avoid their responsibilities will be held to account.”
The measure will also help to prevent directors of dissolved companies from setting up a near-identical business after the dissolution, often leaving customers and other creditors, such as suppliers or HMRC unpaid. The measures included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill are retrospective and will enable the Insolvency Service to also tackle Directors who have inappropriately wound up companies that have benefited from Bounce Back Loans.
“As we build back better from the pandemic, we need to restore business confidence, but also people’s confidence in business - which is why we will not hesitate to disqualify”, continued Kwarteng.
ICAEW responded to a BEIS consultation back in 2018 based on insolvency and corporate governance, which raised certain questions around scrutiny and dissolved directors. The consultation asked if there is a problem in this area and if action should be taken to prevent directors from avoiding liabilities and scrutiny by dissolving their companies. ICAEW supported the proposed measures, stating that it agreed “there is a problem, and the proposal seems reasonable”.
The measures will sit with the Secretary of State for Business Kwasi Kwarteng and are contained in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, announced this week. This Bill also delivers on the commitment to rule out COVID-19 related material change of circumstances (MCC) business rate appeals. This is because market-wide economic changes to property values, such as from COVID-19, can only be properly considered at general rates revaluations.
To support this, the government is providing £1.5bn to sectors that have suffered most economically over the pandemic. Allowing business rates appeals based on a ‘material change in circumstances’ could have led to significant amounts of taxpayer support going to businesses that have been able to operate normally throughout the pandemic and disproportionately benefitting particular regions like London.
The Directors Disqualification Measure implements a policy first announced in August 2018. The government announced it would implement when Parliamentary time allowed and was introduced on 12 May in part to deliver on measures to combat Bounce Back Loan fraud as announced in Budget 2021.
Further resources:
- More information about director disqualification can be found here: Company director disqualification
- ICAEW’s comment on the consultation on insolvency and corporate governance published by BEIS on 20 March 2018.