New Law Passed to Crack Down on Directors Dissolving Companies with Unpaid Loans

Published on:
January 11, 2022

A new law has been introduced by the government in an attempt to crack down on fraudulent behaviour relating to covid-19 loans. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act (“Act”) 2021, essentially aims to stop directors dissolving companies as a way of avoiding paying back loans. Dissolving a company simply means shutting it down: once a company has been dissolved, it ceases to legally exist.

The Act is seen by many as a response to the widely reported concern that circa £5 billion of the £47 billion lent out by the Government during the pandemic has already been lost to fraud. The vast majority of this money was for the Bounce Back Loan scheme, whereby 29 approved lenders – including major retail banks – offered to lend up to £50,000 through a government-guaranteed system. This has meant that Government is the only party to have lost out, as all the lenders had their loans guaranteed by the government, regardless of whether the borrowers could, or did, repay.

This law addresses an established loophole, whereby directors of companies with significant debts were dissolving their companies with the intention of avoiding repaying their creditors. Prior to the Act, once a company has been dissolved and a certain amount of time has passed, a creditor (i.e. the lender) has very little legal recourse to claim back their money from the directors of the company.

Prior to the Act, creditors who wished to object to the dissolution of a company did have a notice period in which to do so. However, there is no formalised procedure which ensures that all interested parties – such as creditors – learn of any dissolution proceedings, meaning that often they find out too late to object. This means they would have no recourse through which to claim their money back, something that many considered unfair. The Act aims to change that.

Whilst one of the only options a creditor had previous to this Act was to bring court proceedings to restore the potentially fraudulent company to the register at Companies House, this was seen as disproportionately expensive and time-consuming for small amounts of debt. Equally, creditors could make a report to the Serious Fraud Office (SFO) if they have enough evidence. Again, however, this was practically difficult as the SFO would only occasionally deal with relatively small claims.

Practically, the new system put in place by the Act will work through the extended powers given to the Insolvency Service, a subsidiary of the Government’s Department for Business, Energy and Industrial Strategy. Thanks to the Act, the Insolvency Service now has the power to investigate former directors of dissolved companies. Prior to the act, the service could only investigate companies entering insolvency, and so this will evidently make it more difficult to escape scrutiny. Also important from a practical point of view, is that the Act will apply retrospectively. This means that any director who may have acted with fraudulent intentions could be investigated, even if the behaviour pre-dates the Act.

Besides from being forced to pay compensation to creditors, the costs of being found guilty of fraudulent behaviour will mean that former directors of such companies will be disqualified from acting as a company director in the UK for up to 15 years. This sanction will be administered by the Insolvency Service itself and was another of the new powers granted to it. In the most serious cases they may face prosecution for committing fraud, but this would not be dealt with the Insolvency Service.

Whilst the focus for the Insolvency Service at the moment will be on Bounce Back Loans, and ensuring the Government recovers fraudulent loans, going forward this could have much wider ramifications as it could open up a new avenue for smaller and medium-sized creditors to reclaim their loans through if companies who owe them money are dissolved. Watch this space.


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