New Legislation over Company Dissolution that Directors Need to Understand About Bounce Back Loans and other Covid Funding.
Directors of Dissolved Companies can now be investigated by the Insolvency Service
More than £28bn was paid out in Covid Loans before basic anti-fraud measures were put in place, and it is estimated that some 7.5% of these loans might be lost to fraud. However, it is important to remember that not every Director of every Company that enters liquidation with an outstanding Covid Loan or Grant is guilty of taking out a loan fraudulently or not using the monies for their intended purpose. Indeed, Covid Funding and Furlough Loans were put in place with the purpose of saving the UK economy from disaster.
Even though most Covid Loans may not have been taken out fraudulently, for some such Directors the loans were not enough to avoid insolvency. Whilst it has been normal practice for the Directors of an insolvent Company that enters Liquidation to face investigation by The Insolvency Service, with effect from February 2022 new legislation (*see below for full details, with thanks to Neil Davies and Partners, Insolvency Solicitors) means that Directors of failed and subsequently dissolved companies will now also face scrutiny. Taking professional advice as early as possible and being fully aware of your options is vital.
In this article, we look at the new legislation being introduced around the Dissolution of Companies and what this means for Directors of Dissolved Companies.
What is Company Dissolution?
The Companies Act 2006 allows the Directors of a company to apply for its voluntary strike-off and dissolution. On the face of it, the procedure offers a relatively straightforward and cost-effective way to close-down a non-trading company.
However, the procedure also provided for potential abuse. After 15 December 2021, Directors of dissolved companies no longer fell outside the remit of the Company Directors Disqualification Act 1986 (‘CDDA’). As a result, the use of the voluntary strike-off process no longer enabled Directors to avoid:
- Investigation by the Insolvency Service.
- The risk of Director Disqualification.
- The risk of being made personally liable for the company’s debts.
What is the Legislative Change?
(*We are grateful to Neil Davies and Partners, Insolvency Solicitors for their input)
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill received Royal Assent on 15 December 2021. Most of its provisions will come into force on 15 February 2022. It extends the provisions of the CDDA to Directors of dissolved companies, enabling the Insolvency Service to investigate their conduct and apply for their disqualification (where appropriate).
Specifically, the following changes will apply:
- Whilst Companies can be dissolved without going through insolvency proceedings, the Insolvency Service will now have the power to investigate the conduct of a Director of a company that was dissolved without first going through insolvency proceedings. If their conduct makes them ‘unfit’ to be concerned in the management of a company, the Insolvency Service can apply to the Court for a Disqualification Order.
- The above power can be exercised up to 3 years after dissolution.
- A Director Disqualification Compensation Order can also be sought where a former Director of a dissolved company has caused loss to creditors.
Dissolution of Companies and Bounce Back Loans – Will Proposed New Legislation Limit the Scope for Fraud by Fraudulent Directors?
In the first three months of 2021, almost 40,000 companies were struck off the Companies House register, a staggering increase of 743% in the first three months of 2020.
Speculation that these figures related to avoidance of coronavirus-related loan repayments led the Department for Business, Energy and Industrial Strategy (‘DBEIS’) to take the unusual step, in March 2021, of making a blanket objection to any application for dissolution by any company with an unpaid Bounce Back Loan. It is believed that this may have prevented the dissolution of almost 51,000 companies, with unpaid loans totalling over £1.7 billion.
With the implementation of the new legislation detailed above, it seems likely that as businesses face up to the changes and challenges that 2022 presents, including, high energy costs, supply chain issues, staff shortages, continued disruption due to Omicron and the repayment of Covid loans, we will see company insolvencies (particularly liquidations) continue to rise in the UK in the months ahead, especially since the dissolution route becomes unavailable.
How can we help?
Covid-19 disruption for business is far from over. For businesses facing financial difficulties, the sooner Directors take professional advice, the more options they may find available to them, such as restructuring and recovery procedures (see Administrations: and Company Voluntary Arrangements). In addition, where Liquidation is the only option, we will fully assist with the orderly wind down and closure of insolvent companies by way of the Creditors Voluntary Liquidation (CVL) process.
With specific reference to Bounce Back Loans (BBLs), the new legislation means that a company with an outstanding BBL can no longer be dissolved and struck off without the possibility of an Insolvency Service investigation. This means that an insolvent limited company with an outstanding bounce back loan can only be voluntarily wound down, by using a CVL, and not by dissolution.
As licensed insolvency practitioners, companies can approach us direct, or via their accountant, and we will look closely at their situation before recommending the best course of action.
If you (or a client) need our help and advice regarding any of the processes detailed above, whether or not a COVID loan has been obtained, please contact us or call any of our offices, below, for a FREE initial discussion.
Also, K&W Recovery, trading as Antony Batty and Company, Thames Valley: