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Bouncing into insolvency could be a problem for clients

HMRC and the Insolvency Service could target directors they believe have liquidated their company to wipe off debts. Financial Accountant asked experts what this could mean for clients. 

Bouncing into insolvency could be a problem for clients
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The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, once implemented, will introduce important changes to the liabilities of former directors of dissolved companies by amending certain provisions of the Company Directors Disqualification Act 1986.

The bill seeks to address concerns that the voluntary strike off (or dissolution) process could be used by some to avoid the repayment of the government-backed loans, given to businesses during the pandemic to provide support without the scrutiny that comes with an insolvency.

Currently, the disqualification regime is aimed at investigating the conduct of, and if appropriate disqualifying, directors of companies that have been subject to formal insolvency proceedings. This means that, at present, the Insolvency Service must apply to court for an order restoring a company before they can commence action, which delays any investigatory action and can be costly.

What do you need to know?

  • The proposed changes will extend the investigatory powers of the Insolvency Service to include the former directors of dissolved companies and, where appropriate, take action to disqualify those individuals whose conduct demonstrates that they are unfit to be involved in the formation, marketing or management of a company.
  • A disqualification order can be made for a period of between two and 15 years, but will not be able to be made once a period of three years has passed from the dissolution of the company.
  • A further amendment to the legislation will allow the Insolvency Service to request information or documentation about the conduct of a former director of a dissolved company from any person in possession of such information or documentation.
  • Compensation claims can be brought where the former director’s conduct has led to losses for the company’s creditors.
  • The bill is intended to have retrospective effect, meaning that the Insolvency Service can use its new powers to take action against directors of companies that were dissolved prior to the introduction of the legislation.

With repayments starting to fall due on the £65bn+ of Bounce Back Loans (BBLs) and Coronavirus Business Interruption Loans (CBILs), the Insolvency Service is expected to take full advantage of their new powers under the bill, once enacted. In the absence of any funds being available to meet the costs of a formal insolvency process, directors may be considering the voluntary strike off process as a way of winding down the company’s affairs. It is vital that directors are aware of and understand all of the options available so that they don’t inadvertently expose themselves to personal liability.

One size does not fi t all so now, more than ever, it is important for directors to seek the right advice at an early stage regarding the company’s affairs, particularly where the company is or may become insolvent.

Meghan Andrews, restructuring and insolvency director, Azets

More detail on the Insolvency Service’s plans can be found here:

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