The Insolvency Service has been given new powers to target company directors who dissolve their businesses and leave staff or taxpayers out of pocket
Under new legislation, the Insolvency Service will be given powers to investigate directors of companies that have been dissolved, closing a legal loophole and acting as a strong deterrent against the misuse of the dissolution process.
The process will no longer be able to be used as a method of fraudulently avoiding repayment of government backed loans given to businesses to support them during the Coronavirus pandemic.
Extension of the power to investigate also includes the relevant sanctions such as disqualification from acting as a company director for up to 15 years. These powers will be exercised by the Insolvency Service on behalf of the business secretary.
At present, the Insolvency Service has powers to investigate directors of live companies or those entering a form of insolvency. If wrongdoing or malpractice is found, directors can face sanctions including a ban of up to 15 years.
The measure will also help to prevent directors of dissolved companies from setting up a near identical business after the dissolution, often leaving customers and other creditors, such as suppliers or HMRC, unpaid.
The measures included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill are retrospective and will enable the Insolvency Service to also tackle directors who have inappropriately wound-up companies that have benefited from Coronavirus Bounce Back Loans.
Business secretary Kwasi 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 companies means those who have previously been able to avoid their responsibilities will be held to account.’
Dr Roger Barker, director of policy and corporate governance at the Institute of Directors, said: ‘Company directors fulfil a central role in ensuring that their businesses are well governed. Although corporate dissolution may be inevitable in some cases, it should only be used as a last resort – after all other realistic avenues for protecting the interests of stakeholders have been exhausted. Using company dissolution as a mechanism for the evasion of a directors’ duties has no place in the governance of a responsible enterprise.’
This Bill also delivers on the commitment to rule out Covid-19 related material change of circumstances (MCC) business rate appeals. This is due to the fact that market-wide economic changes to property values, such as from Covid-19, can only be properly considered at general rates revaluations.
To support this, the government is providing £1.5bn to sectors which have suffered most economically over the pandemic, ensuring support is provided to businesses in England in the fastest and fairest way possible. Allowing business rates appeals on the basis of a ‘material change in circumstances’ could have led to significant amounts of taxpayer support going to businesses who have been able to operate normally throughout the pandemic and disproportionately benefitting particular regions like London.
The directors’ disqualification measure implements a policy first announced in August 2018. The government announced it would be implemented when parliamentary time allowed and was introduced on 12 May in part to deliver on measures to combat Bounce Back Loan fraud as announced in Budget 2021.