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UK

17/08/2021

New legislation to combat bounce back loan defaulters will make it harder for directors to abandon their company and their responsibilities. BDN outlines the new rules and regulations involved with insolvency.

It’s a bugbear of many that some directors of failed companies seem to “get away with it” when their businesses fail and debts go unpaid. And this is especially troubling when directors game a system that has provided them with safe harbour in a time of pandemic.

But the tide is changing as the government has recently brought forward legislation – the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill – that specifically targets company directors who proactively dissolve their businesses.

Dissolution via strike-off or voluntary liquidation was designed to be used by a small business without a prior insolvency and only when the company no longer had any assets, had not been trading, and where creditors had been informed. However, the process has been abused by directors who simply wound up their companies without putting them through an insolvency process so as to leave liabilities behind and escape investigation.

While the aim is to close a loophole that lets directors walk away without repaying any governmental support – specifically, government-run interest-free bounce back loans of up to £50,000, of which 1.5 million were taken out by small businesses – it also gives the Insolvency Service powers to investigate directors of any company that has been dissolved. There will also be an extension of the power to investigate to apply relevant sanctions such as disqualification from acting as a company director for up to 15 years.

The director’s disqualification measure implements a policy that the government first announced in August 2018. The bill was introduced mid-May in part to also deliver on measures to combat Bounce Back Loan fraud, as announced in the recent budget.

Under the current rules, the Insolvency Service can investigate directors of live companies or those entering a form of insolvency and if wrongdoing or malpractice is found, those directors can face sanctions including a ban of up to 15 years. But for the Insolvency Service to take disqualification action against directors of disqualified companies, they first need to make an application to a court to have the company restored.  This time-consuming exercise delays the investigatory action, and is costly, with the costs falling on the public purse.

Through the measures, directors of dissolved companies could also be banned from setting up an almost identical business after the dissolution. The goal is to reduce the number of customers and other creditors, such as suppliers or HMRC, being left unpaid.

The legislation, when enacted, will have retrospective applicability. The rationale appears to be that the government wants to target individuals who have inappropriately wound-up companies after receiving Bounce Back Loans, presumably having used those loans for the directors’ personal benefit. It will cover England, Scotland, Wales and Northern Ireland.

The guiding principle of the new legislation is that while corporate dissolution may be inevitable in some cases, it should only be used as a last resort – that is, after all other realistic avenues for protecting the interests of stakeholders have been exhausted. The government considers that using company dissolution as a method to evade a directors’ duties has no place in the governance of a responsible enterprise. Directors who use, or have used, the dissolution process for those purposes can therefore expect to find themselves in the cross hairs of the Insolvency Service once the legislation becomes law.

As ever, directors should always be conscious of their duties, particularly in circumstances where the company is or may become insolvent and take appropriate advice prior to instigating any wind-down or dissolution process.