The government is set to take action to slam shut a loophole in insolvency rules frequently used by unscrupulous directors to escape investigation over failed companies.
Creditors have long complained that the Insolvency Service’s inability to open cases into dissolved companies has handed directors an opportunity to dodge accusations of malpractice.
If a company cannot pay its debts and is declared insolvent, an appointed administrator or liquidator has the power to investigate the conduct of directors and report findings to the Insolvency Service. If wrongdoing is proven, directors can face being banned from running a business for up to 15 years.
But to date, the same powers haven’t extended to companies that are dissolved voluntarily. Although there is supposed to be a formal notification process if business owners intend to have a company ‘struck off’ the Companies House directory - including signalling the intentions to creditors - in practice many creditors have complained about companies being intentionally wound up to avoid repaying debts before they had any word about it.
In such cases, a creditor’s chances of recovering the debt are effectively ended, bar launching potentially lengthy and costly legal proceedings to have the company reinstated so it can be investigated.
Insolvency Service Powers Extended
All of that is about to change, as the government has introduced a bill in Parliament which, if passed into law, will give the Insolvency Service the power to ‘retrospectively’ look into the conduct of company directors even when a company has already been dissolved.
The irony of the timing and reasoning behind the measures won’t be lost on ordinary creditors. The proposals included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill have been put forward precisely because the government wants to clamp down on rogue operators who have benefitted from COVID-19 Bounce Back Loans trying to use dissolution as a means of avoiding having to pay the money back.
The modus operandi of directors who have used the dissolution loophole in the past has often been to set up near-identical companies as soon as the previous one is struck off - to the double frustration of unpaid creditors as the new entity has no legal responsibility for the old debts, even when the same people are involved in running both businesses.
The extension of the Insolvency Service’s powers, however, will mean directors can no longer hide behind a new legal entity. If creditors claim that a previous company run by the same director or directors defaulted on a debt, the Insolvency Service will now be able to investigate the dealings of that business even after it has ceased to exist.
