Business Secretary Kwasi Kwarteng has advised that the Government is committed to tackling those directors who seek to leave British taxpayers out of pocket by abusing the financial support provided during the COVID-19 pandemic, and it appears that this new legislation is a step in the right direction towards achieving this goal.
Here we give a brief overview of the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 (Act), which comes into force in England, Wales, Scotland, and Northern Ireland on 15 February 2022.
More specifically, we explore whether this new legislation will close the pre-existing loophole for directors to evade liability for their actions through the misuse of the voluntary strike-off procedure.
Background
During the COVID-19 pandemic, the UK government introduced the bounce back loan scheme in response to the cashflow pressures on businesses in the UK arising out of the pandemic and national lockdown restrictions. Under this scheme, approximately £46.5 billion was lent to over 1.5 million businesses and, therefore, concerns relating to the abuse of the voluntary strike-off procedure has gained new urgency with the widely known and much-published issues surrounding the repayment of the loans.
The underlying aim of the Act is to clamp down on those directors who have abused the bounce back loan scheme and attempted to avoid liability for their actions through utilising the procedure to dissolve the company, thereby side-stepping the scrutiny of the investigatory powers of insolvency practitioners and the Insolvency Service.
The Act
The voluntary strike-off procedure is intended to be used only by dormant companies with no liabilities; however, the lack of scrutiny can make it appear a more attractive route than a formal insolvency procedure for directors who wish to evade company liabilities.
Whereas previously, the Insolvency Service only had the power to investigate directors of active companies or companies subject to a formal insolvency procedure, the Act extends these investigatory powers to directors of dissolved companies.
Under the provisions of the Act, an investigation into a director of a dissolved company may be triggered where a complaint is made to the Insolvency Service, or through a connection with an existing investigation relating to an active or insolvent company.
Significantly, the Act will apply retrospectively, meaning that it will apply to directors who dissolved a company prior to the legislation coming into force (there will be no need to restore the company before an investigation can take place).
If the Insolvency Services’ investigation detects evidence of misconduct, directors of dissolved companies will now face the same range of sanctions as directors of companies that have gone through a formal insolvency process, the sanctions include:
- Disqualification as a director for up to 15 years
- An order to compensate creditors who were left out of pocket due to the fraudulent actions of the director
- Prosecution (in the most serious of cases)
Conclusion
Ultimately, although the Act may go some way in narrowing the loophole which currently allows directors to misuse the voluntary strike-off procedure without investigation (or consequence); it is currently unclear if the introduction of the new legislation will be a strong enough deterrent against rogue directors seeking to evade company liabilities.
How can we help?
Prosperity Law LLP has specific expertise in advising a wide range of clients on matters relating to corporate governance and insolvency.
For more information, please contact Simon Gerrard, Partner and Head of Insolvency, on 0161 667 3686 or at simon@prosperitylaw.com.
