Crackdown on directors who dissolve companies to evade debts

Crackdown on directors who dissolve companies to evade debtsIn a significant move towards safeguarding the interests of employees, creditors, and taxpayers, a potent tool has been introduced to hold rogue directors accountable.

Directors who resort to dissolving their companies as a means to evade financial obligations will now face potential disqualification from holding directorial positions. This noteworthy development marks a crucial step in enhancing corporate transparency and responsibility.

Under these new measures, authorities possess the authority to scrutinize the actions of company directors who exploit dissolution as a means to avoid paying liabilities.

This particularly addresses scenarios where employees are left without proper compensation, creditors suffer losses, and the taxpayer bears an undue burden.

By instituting disqualification as a consequence, regulators are sending a strong signal that such behavior will not be tolerated

Loophole closed

The new Act addresses a perceived gap in the system where directors dissolve companies instead of liquidating them to evade investigation under the Company Directors Disqualification Act 1986.

The Insolvency Service currently possesses the authority to scrutinize directors of companies that undergo various forms of insolvency, such as administration and liquidation. The service can even probe active companies if there’s proof of misconduct.

This Act broadens the scope of these investigative powers to encompass directors who choose to dissolve companies. If such directors are found to have engaged in wrongdoing, they could be subjected to penalties like disqualification as a company director for a maximum of 15 years. In the most severe instances, prosecution might also be pursued.

Directors can be retrospectively investigated

The Act allows for a retrospective investigation of past directors of companies that have been dissolved. This investigation window extends up to three years following the company’s dissolution. If any fraudulent behavior is uncovered during this process, the Secretary of State is empowered to seek court action to disqualify the director.

Furthermore, in cases where the director’s actions have resulted in financial losses for the creditors of the dissolved company, the director can be held responsible for compensating these creditors. This provision ensures that directors are held accountable for any adverse consequences arising from their conduct.

Government committed to going after those who have abused financial support

In response to the new legislation, Kwasi Kwarteng, the Business Secretary, emphasized the UK’s commitment to fostering an optimal business environment. He highlighted the extensive support provided to businesses during the pandemic and underscored that the introduced powers aim to rein in unscrupulous directors who attempt to evade repaying debts, including government loans designed to bolster businesses and safeguard jobs. The government is resolute in its efforts to confront those who exploit COVID-19 financial aid, which has played a crucial role in sustaining businesses.

The essential responsibility that directors bear in maintaining accurate accounting records for their companies that the utilization of a Bounce Back Loan should exclusively benefit the business and never be diverted for personal purposes.

Directors that fail to account for the appropriate use of a Bounce Back Loan or misusing it for personal expenses carries severe consequences effectively closing this loophole.

Such actions could lead to disqualification as a director or the extension of bankruptcy-related restrictions. This underscores the importance of adhering to proper financial practices and ethical conduct in the business realm.

Notes to editors

The measures will be introduced under the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act and the legislation will cover England, Scotland, Wales and Northern Ireland. The Act received Royal Assent on 15 December 2021 .

More information about director disqualification is available on GOV.UK.

The Directors Disqualification Measure implements a policy first announced in August 2018. The Government announced it would implement when Parliamentary time allowed and the Bill was introduced on 12 May in part to deliver on measures to combat Bounce Back Loan fraud as announced in Budget 2021.

Steve Jones Profile
Insolvency & Restructuring Expert at Business Insolvency Helpline

With over three decades of experience in the business and turnaround sector, Steve Jones is one of the founders of Business Insolvency Helpline. With specialist knowledge of Insolvency, Liquidations, Administration, Pre-packs, CVA, MVL, Restructuring Advice and Company investment.