Directors found abusing company closure rules to worm their way out of paying creditors can now be disqualified from holding future positions.
In a welcome crackdown on debt avoidance, the government has extended the powers of the Insolvency Service so it can now investigate voluntary dissolution of companies. If directors are found to have shut down their business with the primary motive of wiping off debts, the Insolvency Service can now bring misconduct charges against them.
As well as being disqualified for up to 15 years, directors could be ordered to pay compensation to unpaid creditors.
It’s a long-overdue closure of a well-known debt loophole. Under limited company rules, any business struck off the companies register, dissolved or put into liquidation has its liabilities for outstanding debts wiped off.
The regulations state that insolvent companies cannot be voluntarily closed down by their directors. They must go through a formal process overseen by the Insolvency Service with a view to paying off their debts before being liquidated.
However, the same doesn’t apply to solvent companies. The key criteria for voluntary dissolution is that companies must a) have a positive account balance and b) must have ceased trading for a minimum of three months before applying to be struck off.
A step forward, but in whose interests?
It’s long been obvious how this system is open to abuse. If an unscrupulous company director wants to pilfer the assets of a solvent business without paying off creditors in full, all they have to do is let the business lie dormant for three months while still servicing debts, and then apply to have it struck off.
What is more, up until now, the Insolvency Service has had no powers to investigate the circumstances of company dissolutions - even when creditors complain that they have been left out of pocket.
While this move from the government is certainly a welcome step forward, the timing of it shouldn’t be lost on staff, suppliers and other ordinary creditors. For years, small business groups and debt campaigners have been pointing out the flaw in the voluntary dissolution rules. These pleas have fallen on deaf ears.
But in the wake of the COVID-19 pandemic, the government has suddenly found itself falling foul of these same scams. After handing out billions in COVID support loans, the Treasury soon realised that rogue operators were taking the money, using lockdown as an excuse not to trade for three months - and then promptly shutting the business down, with no liability to pay the loan back to HMRC.
Let’s hope that enforcement actions around voluntary dissolution covers all cases of suspected malpractice, and isn’t just focused on government loans.