A government press announcement released on 12 May 2021 details new powers that will be used to investigate companies seeking to avoid a formal insolvency, liquidation or administration process, by using a loophole.
The Insolvency Service will be given powers to investigate directors of companies that have been dissolved, closing a legal loophole and acting as a strong 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 the relevant sanctions, such as disqualification from acting as a company director for up to 15 years. These powers will be exercised by the Insolvency Service on behalf of the Business Secretary.
At present, the Insolvency Service has powers to investigate directors of live companies or those entering a form of insolvency. If wrongdoing or malpractice is found, directors can face sanctions including a ban of up to 15 years.
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.
Business Secretary Kwasi Kwarteng said: “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 directors who deliberately leave employees and the British taxpayer out of pocket.
“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.”
Dr Roger Barker, Director of Policy and Corporate Governance at the Institute of Directors, said: “Company directors fulfil a central role in ensuring that their businesses are well governed. 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 measure, which will sit with the Secretary of State for Business, Kwasi Kwarteng, is contained in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill.
The Insolvency Service will now be able to investigate the conduct of the directors of live companies and companies which enter a form of insolvency. It has been indicated that these investigatory powers will now be used with regard to dissolved companies without the need for them to be restored to the register of companies and put into liquidation.
The new measures seek to discourage directors from abuse of the dissolution process in an effort to avoid scrutiny of their conduct, and in particular as a way to avoid repayment of Government-backed loans procured during the pandemic.
The Bill is called the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) and, when it receives Royal Assent, it will amend various sections of the Company Directors Disqualification Act 1986 (“DDA”) to allow disqualification proceedings to be brought against directors of dissolved companies, not previously involved in any insolvency process.
Before the extension of the legislation, the DDA applied solely to directors of insolvent or live companies. This new procedure will apply retrospectively. Originally considered in 2018, the measures have been brought to the forefront of the Governments agenda, to combat Bounce Back Loan fraud.Company rescue for businesses facing failure as a result of COVID 19
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