Crackdown on Directors who Close Companies to Avoid Debts

The government has announced a crackdown on directors who dissolve their companies to evade their debts.

Directors can shut down their firms because they are trying to avoid paying creditors such as HMRC, their employees, and suppliers. However, they now face being disqualified from acting as director through the Insolvency Service being granted new powers.

The new legislation extends the Insolvency Service’s powers, on behalf of the Business Secretary and will result in the investigation and disqualification of company directors who abuse the process to dissolve a company dissolution.

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act will also take on directors who dissolve companies to avoid repaying Government-backed loans that were put in place to support businesses during the Coronavirus pandemic.

Business Secretary Kwasi Kwarteng said: “These new powers will curb those rogue directors who seek to avoid paying back their debts, including government loans provided to support businesses and save jobs. Government is committed to tackling those who seek to leave the British taxpayer out of pocket by abusing the covid financial support that has been so vital to businesses.”

What are the Insolvency Service’s New Powers?

The Insolvency Service currently has powers to investigate directors of companies that enter insolvency, including administration and liquidation, and may also be instructed to investigate live companies where there is evidence of wrongdoing.

The Act now extends those investigatory powers to directors of dissolved companies and if misconduct is found, directors now face sanctions including being disqualified as a company director for up to 15 years or, in the most serious of cases, prosecution.

The Business Secretary will also be able to apply to the court for an order to require a former director of a dissolved company, who has been disqualified, to pay compensation to creditors who have lost out due to their fraudulent behaviour.

The Act also delivers on an earlier commitment to rule out COVID-19-related changes as grounds for a material change of circumstances (MCC) business rate appeals.

This is because market-wide economic changes to property values, such as from Covid-19, can only be properly considered at general rates revaluations. The government said it was providing £1.5 billion in business rates relief to sectors that have suffered most economically over the pandemic and have not been eligible for existing support linked to business rates. Guidance published on 15 December 2021 will support local authorities to set up their local schemes through which businesses will be able to access relief.

The measures will be introduced under the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act, which passed into law on 15 December, and will cover England, Scotland, Wales, and Northern Ireland.

Simon Renshaw, director with Company Debt, comments: “Too often, some disreputable directors have sought what they believe to be a cheap and fast way out of managing their business debts. Although closing down an insolvent business via dissolution is already illegal, these additional rules and deterrents will make taking action against them easier and act as a reminder that this is not permitted and those who attempt it face severe consequences.”