Will new powers help stop the dissolution process from being abused?

The Insolvency Service has recently gained extended powers to investigate directors following the dissolution of companies, potentially making it possible to recoup funds if evidence of abuse is found.

These extended powers are part of The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act. Prior to this legislation being introduced, directors of dissolved companies fell outside the scope of the Company Directors Disqualification Act 1986 (“CDDA”), meaning that the Insolvency Service couldn’t investigate their conduct if the company had been dissolved off the register.  The company had to be restored to the register before this could happen. This barrier to investigation allowed some directors who should have been subject to disqualification proceedings to slip under the radar.

Restoring a company to the register can be costly

The process of restoring a company to the register can be costly and whilst it can be advantageous in some circumstances, it can also be seen as throwing good money after bad.

The new legislation, giving the Insolvency Service extended powers, will help to close the ‘dissolution loophole’.  In addition, directors could be subject to sanctions if evidence of misconduct is found. Crucially, the Act takes effect retrospectively and investigations can be undertaken into directors’ conduct, where the company was dissolved prior to the commencement of the Act.

This new legislation has been widely welcomed and it does provide more confidence and certainty. However, an investigation is not automatically triggered upon dissolution of a company and requires creditors and other stakeholders to report any concerns they have in respect of an individual director’s conduct to the Insolvency Service.

The Act was initially accelerated by the UK Government following widespread concern over the number of fraudulent Bounce Back Loan claims made during the pandemic. In addition to the legislation, HMRC has launched an investigation to find and recoup funds from businesses that it suspects may have deliberately abused the Coronavirus Bounce Back Loan support scheme.

In January 2023, a House of Commons Committee Report (“the Report”) reflected on the situation and made a number of recommendations. It stated that the UK Government is disappointed that HMRC only expects to recover around a quarter of the £4.5 billion it estimates was lost due to fraudulent claims for COVID-19 support. The Report also suggested that HMRC has a moral duty to pursue fraud to ensure fairness and maintain a level playing field for businesses and individuals that did not abuse the schemes.

Whilst legislation alone will not facilitate payments to creditors, the UK Government has suggested that in the more serious cases, Compensation Orders may be issued against directors. Only a few Compensation Orders have been issued to date, but this seems set to increase.

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