Crackdown on directors who dissolve companies to evade debts including Bounce Back Loans
Directors who dissolve companies when there are still liabilities owed to staff, creditors and HMRC are now being specifically targeted for Director disqualification.
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 received royal assent in December and enables The Insolvency Service to investigate and disqualify company directors who abuse company dissolution process.
The Act will also help tackle directors who dissolve companies to avoid repaying Government backed loans such as the Bounce Back Loan put in place to support businesses during the Coronavirus pandemic.
The new Act closes what is perceived as a loophole in the system whereby a director dissolves a company rather than liquidating it thereby avoiding investigation under the Company Directors Disqualification Act 1986.
The Insolvency Service already has powers to investigate directors of companies that enter a form of insolvency, including administration and liquidation and it may also investigate live companies where there is evidence of wrongdoing.
This Act extends those investigatory powers to directors who dissolve companies and if misconduct is found, directors can face sanctions including being disqualified as a company director for up to 15 years or, in the most serious of cases, prosecution.
Directors can be retrospectively investigated
Former directors of dissolved companies can be retrospectively investigated – up to three years after a company has been dissolved, and if any fraudulent activity is exposed, the Secretary of State has the power to apply to court to disqualify the director.
Additionally, if the director’s conduct has led to creditors of the dissolved company suffering a loss, the director can also be held accountable for compensation.
Clear message from The Insolvency Service – 13-year ban for Rotherham ‘Bargain Basement’ director
In November 2021, The Insolvency Service imposed a 13-year ban on a director from Rotherham who fraudulently obtained £150,000 in Covid-19 Bounce Back Loans.
Muneef Ihsan, 26 from Rotherham, was director of three companies between 2019 and 2020. All three were registered at the same residential address in Rotherham, and were each placed into voluntary liquidation by Muneef Ihsan in September 2020.
The liquidations triggered an investigation by the Insolvency Service, which found that Muneef Ihsan opened a bank account for each company in June 2020, after the pandemic began, for the sole purpose of fraudulently obtaining three £50,000 Covid-19 Bounce Back Loans.
As there was no evidence that any of the companies had ever traded, none of them were eligible for the loans, which the government made available for genuine firms that were struggling to keep going during lockdown.
Robert Clarke, Chief Investigator for the Insolvency Service, said:
“Abuse of Covid-19 support schemes, which have provided essential financial assistance to millions by helping businesses trade during the pandemic and protecting jobs, cannot be tolerated.
“The Insolvency Service has sent out a clear message that where a company is being used to facilitate fraudulent activity, action will be taken to remove the directors from the corporate arena for a lengthy period of time.”
Government committed to going after those who have abused financial support
Commenting on the new legislation, business Secretary Kwasi Kwarteng said:
“We want the UK to be the best place in the world to do business and we have provided unprecedented support to businesses to help them through the pandemic. These new powers will curb those rogue directors who seek to avoid paying back their debts, including government loans provided to support businesses and save jobs. Government is committed to tackle those who seek to leave the British taxpayer out of pocket by abusing the covid financial support that has been so vital to businesses.”
Commenting, Jason Elliott, Partner at Cowgills Business Recovery said “All directors have a duty to ensure their companies maintain proper accounting records and it goes without saying that the use of a Bounce Back Loan must be for the benefit the business and never for personal use.
“Failure to account for how a Bounce Back Loan was used, or using it for personal payments is extremely serious and, can result in being disqualified as a director or the extension of bankruptcy restrictions.”
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The information was correct at time of publishing but may now be out of date.