The Insolvency Service is set to be granted new powers to crack down on the misuse of a formal dissolution process. This will effectively close a legal loophole and act as a deterrent to directors looking to use the process as a way to avoid repayment of government-backed COVID-19 support funding.
As a result, if found guilty of misconduct, directors are likely to face severe penalties and sanctions, and will likely be disqualified from acting as the director of a limited company for up to 15 years.
Dissolving a company
Dissolving a company – otherwise known as ‘dissolution’ or ‘striking off’ – essentially means removing the company from the official register at Companies House, at which point it ceases to legally exist.
Dissolving a company is usually a voluntary decision, made by the Directors. However, Companies House does have the authority to dissolve any company that has failed to maintain its accounting responsibilities.
Whilst dissolution may be inevitable in some cases, it should only be used as a last resort given the impact it can have on stakeholders, customers and creditors, often leaving them in turmoil and out of pocket.
Clamping down on fraudulent activity
At present, the Insolvency Service is limited when it comes to investigating claims of fraudulent trading. Only live companies, or companies that have entered formal insolvency processes – such as administration or liquidation – can be investigated, meaning those that file for voluntary dissolution may slip under the radar.
However, increasing concerns regarding the misuse of the dissolution process has triggered a proposed amendment to existing legislation.
The new legislation, if passed, is set to come into force later this year, and will be retrospective. It will give the Insolvency Service authority to probe the conduct of directors who would have otherwise avoided investigation and will also prevent directors from dissolving companies with active liabilities. It is hoped that the new measure will restore business confidence, with more directors being held accountable for fraudulent activity which may have otherwise gone undetected.
A brighter future for business
In light of the proposed amendment, Michael Roome, Business Recovery and Insolvency Partner and licensed Insolvency Practitioner at Smith Cooper comments:
“A common misconception is that dissolution is a simple ‘exit-strategy’ solution for companies with debt, which is certainly not the case. Not only are there strict dissolution criteria that a company must meet, the consequences of abusing the process as a way of evading creditors are also significant.”
“Unfortunately, there is a perception that too many directors have unscrupulously slipped through the net, avoiding repayment of Government backed loans given to businesses to support them during the COVID-19 pandemic.”
“The new legislation will provide the Insolvency Service with the power to crack down on directors who abuse the system, leaving a trail of unpaid debt in their wake, much to the detriment of creditors and stakeholders who already operate legally and honestly.”
Depending on circumstances, there are several options available to directors who wish to close their company in an efficient way, but it is important to first seek professional help.
The dedicated Business Recovery and Insolvency division here at Smith Cooper can help determine the most effective solution for you and your personal circumstances, helping you navigate financial pressures in a way that effectively manages any detrimental impact. Get in touch to learn more.