Insolvency Service gains powers to investigate directors of dissolved companies

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act, which received Royal Assent on 15 December 2021, is also intended to help the Insolvency Service tackle directors dissolving companies to avoid repaying government-backed loans put in place to support businesses during the coronavirus pandemic.

The Insolvency Service had existing powers to investigate directors of companies entering insolvency, including administration and liquidation, but it will now also be able to investigate directors of dissolved companies.

Former directors of dissolved companies will face disqualification proceedings against them where public interest criteria are met, and the business secretary will be able to seek compensation where a director’s conduct has caused loss to creditors. This will apply with retrospective effect, meaning the conduct of former directors of dissolved companies that took place prior to the act’s commencement may be investigated.

If misconduct is found, directors could be disqualified for up to 15 years or, in the most serious of cases, face prosecution.

Corporate governance expert Tom Proverbs-Garbett of Pinsent Masons said the government had made it clear it wanted to change the law in this area in its 2018 response to its insolvency and corporate governance consultation. 

“It has taken some time to reach this point – given other well-understood priorities – but permitting investigation of the conduct of former directors of a dissolved company, without it being necessary to first restore a company to the register, is a welcome removal of a longstanding loophole. As respondents to the 2018 consultation recognised, although the dissolution process is an important part of making sure the register of companies is up to date, it should not permit people to escape liabilities or to avoid proper insolvency processes,” Proverbs-Garbett said.

Proverbs-Garbett said the legislation’s explanatory notes made it clear the measure was not necessarily intended as a response to large corporate failures, but rather to stop small and medium size enterprises from ‘gaming’ the system.

“It is directors of these small entities, unencumbered by a well-known name or public attention, which more commonly take the opportunity to dissolve their company, effectively shedding its liabilities, before incorporating a new company to continue business almost without pause,” Proverbs-Garbett said.

Restructuring law expert Nick Gavin-Brown of Pinsent Masons said: “The act has been accelerated into law in response to the concerns of widespread fraud in relation to the bounce back loan scheme, where the UK government has estimated around £4.9 billion of the £47 billion lent under the scheme may be lost to fraud.”

“There has already been a wave of applications for voluntary dissolutions by borrowers of bounce back loans, which the UK government has so far held off by using a ‘bulk objection process’ to postpone dissolutions being confirmed at Companies House,” Gavin-Brown said.

“It remains to be seen how far the UK government will use the new powers under the act to pursue individual directors for compensation, where dissolution has been used as a means to walk away from repayment and scrutiny,” Gavin-Brown said. “Bounce back loan lenders have little incentive to pursue directors where they have recovered under their government guarantee, so the onus is on the government. However, individual loans are only up to a maximum of £50,000 and government resources are already stretched with resources being aimed at pursuing organised crime, so the costs of seeking court orders under the act will need to be weighed up.”

The legislation also rules out Covid-19 related changes as grounds for material change of circumstances business rate appeals. The government said this was because market-wide economic changes to property values, such as from Covid-19, can only be properly considered at general rates revaluations.

The government will provide £1.5 billion in business rates relief to those sectors which have suffered most economically through the pandemic, but which have not been eligible for existing business rate support. Local authorities will set up local schemes for businesses to access this relief.