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Crackdown on directors who dissolve companies to evade debts

On the 16th of December a press release was issued from the Department for Business, Energy & Industrial Strategy, announcing new powers granted to The Insolvency Service, in order to tackle the problem of rogue company directors.

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 (which received royal assent on the 15th of December 2021), will enable The Insolvency Service to investigate and disqualify company directors who are abusing the company dissolution process in general, whilst also specifically tackling directors who have been dissolving companies in order to avoid repaying government-backed Covid-19 “bounce-back” loans since the pandemic began.

Former directors of dissolved companies could be retrospectively investigated (up to three years after a company has been dissolved) and should any fraudulent activity be 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. The new act seeks to close a current loophole in the system which means that where a director dissolves a company rather than liquidating it, they can avoid investigation under the Company Directors Disqualification Act 1986.

Despite the new legislation empowering The Insolvency Service to more readily and easily undertake investigations, there are some concerns that they may not have sufficient resource for such an undertaking. Nicky Fisher, deputy vice-president at R3 (a UK trade association for the entire community of UK insolvency and restructuring professionals) expressed this concern, asking: “one key question is whether the insolvency service will have the resource available to conduct these investigations in addition to those they already carry out in respect of directors of insolvent companies. It’s important that the former doesn’t come at the expense of the latter.”

Business Secretary Kwasi Kwarteng also commented on the new legislation:

“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.”

Under the new legislation, directors found guilty of fraudulent activity could face sanctions of disqualification up to 15 years, or in the most serious of cases, prosecution.

Stephen Pegge, Managing Director of UK Finance, said:

“The ability to dissolve a company when necessary is a right reserved in legitimate circumstances where there are no outstanding creditors, however, it can be open to abuse. The banking and finance industry therefore supports this legislation which will provide much needed powers to the Insolvency Service to help hold rogue directors to account by providing additional deterrents and easier enforcement of the rules.”

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3 year ban for Rotherham company director

Muneef Ihsan of Rotherham has been disqualified as a company director and banned for 13 years from any activity involving the promotion, formation or management of a company without the permission of the court. The Insolvency Service investigated three companies which he had voluntarily liquidated in September 2020, finding that separate bank accounts had been opened for each company in June 2020 for the sole purpose of fraudulently obtaining three £50,000 Covid-19 “bounce-back” loans. No evidence was found that any of the companies had ever traded and none of them should have been eligible for the loans, however the support was offered on a “trust, but verify” basis. 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.”

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