Dissolution Loophole is Set to be Closed

UK Law makers are looking to close a legal loophole which currently allows company directors to dissolve their insolvent company rather than put it into a formal into insolvency;  potentially leaving staff, suppliers and taxpayers out of pocket.  For example, without a formal liquidation, staff are unable to claim monies owed to them from the Government’s Redundancy Fund.


Parliament is set to approve new legislation to prevent companies using this loophole; particularly as is it could be misused to avoid paying back the thousands of pounds in Government backed loans granted during the Coronavirus pandemic to support businesses. Such schemes including The Coronavirus Business Interruption Loan Scheme (CBILS) or Bounce Back loans could go unpaid under current laws if a company informally dissolves rather than entering into a formal process like liquidation. At present, the Insolvency Service can only investigate live companies or those undergoing some form of insolvency.


Under the new legislation, the Business Secretary, Kwasi Kwarteng, will grant the Insolvency Service greater power as a strong deterrent to company directors who misuse the dissolution process to fraudulently avoid paying back loans. New sanctions mean individuals found guilty of malpractice could face a ban of up 15 years from acting as a company director and prevent them from setting up near identical businesses after dissolution.


If a company is dissolved through the ‘strike off’ process this is not classed as formal insolvency so they can avoid investigation and sanctions for leaving their customers and other creditors such as HMRC, unpaid.  The assertion is that dissolution should only be an option for companies who are not at threat of insolvency and have not been trading for the three months prior to dissolving the company, not as an alternative to liquidation.


Business secretary Kwarteng said: ‘As we build back better from the pandemic, we need to restore business confidence, but also people’s confidence in business – which is why we will not hesitate to disqualify directors who deliberately leave employees and the British taxpayer out of pocket.’


‘Extending powers to investigate directors of dissolved company’s means those who have previously been able to avoid their responsibilities will be held to account.’


The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill will, if passed, apply retrospectively and will allow the Insolvency Service to investigate and raise sanctions against directors found guilty of inappropriately closing businesses that have benefitted from Government backed loans during the pandemic.


The measure to disqualify such directors was first announced in August 2018 and was introduced on 12 May 2021 as part of a commitment to deliver on measures to tackle Bounce Back Loan fraud.


Companies should follow the correct necessary procedure to close their business to avoid investigation under this potential new law. Any existing financial liabilities should be considered and a formal liquidation route followed to ensure fairness for creditors and to show a willingness to abide by the law.


As an alternative to liquidation, a Company Voluntary Arrangement (CVA) could allow a company facing financial hardship to recover by facilitating a structured negotiation with outstanding loan providers and creditors. This gives an opportunity to restructure the business before making repayments.


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