What is the loophole?
Currently, business directors are able to avoid entering into an insolvency process by dissolving their company. This is made possible due to the strike off process, which is not classified as a formal insolvency procedure, thus opening an avenue through which directors can dissolve their business whilst avoiding investigation into possible cases of misconduct, with the government citing recent abuse of this loophole to fraudulently avoid repayment of loans given to companies as part of the Coronavirus Business Interruption Loan Scheme (CBILS) as reason for taking action.
What will the legislation change?
First announced as a means of tackling Bounce Back Loan fraud in August 2018, this piece of legislation has now been proposed as the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill. The current powers granted to the Insolvency Service only allow regulators to investigate allegations of fraudulent trading for the directors of live companies or companies that have entered into a formal insolvency procedure. Discovery of malpractice can currently see directors punished with numerous penalties, namely facing liability for outstanding company debts and disqualification from assuming the position of a director of a limited company for up to 15 years. The proposed legislation – whose passing seems likely following its first reading in Parliament on the 12th of May – will extend the powers of the Insolvency Service to investigate directors of dissolved businesses and enforce the same punishments as mentioned previously, which the government hopes will act as a deterrent from abuse of the dissolution process in the future, whilst also retrospectively penalising directors whose use of the loophole has left employees and the taxpayer out of pocket.
What does this mean for companies facing closure?
As the news of this bill so clearly demonstrates, going through the formal passages of insolvency and liquidation is recommended to avoid any possible allegations of malpractice and ensure a fair outcome for the director of their business, as well as their staff and creditors, so appointing a licensed insolvency practitioner (IP) would be advised for companies with existing liabilities. Insolvency does not necessarily mark the end for a business, and an IP is there to provide a professional assessment on the state of a company and outline the best course of action going forward, in a way that will both support the business’ recovery where possible and satisfy its outstanding creditors. Seeking the help of an IP could prove prudent even before reaching the point of insolvency, as if a company is found to still be solvent, IPs are able to offer expert insight into numerous means by which a business’ situation can be improved, such as advice on improving cash flow or suggesting repayment solutions to keep creditors happy and avoid the risk of insolvency proceedings being issued against the company. With the recent unforeseen changes in many business’ circumstances as a result of the COVID-19 pandemic and now the likelihood of this dissolution loophole being closed, considering the aid of a licensed insolvency practitioner is more important than ever before.
Seeking help from an insolvency practitioner
If you would like to seek business recovery advice, contact Voscap today on 020 7769 6831, or email team@voscap.co.uk, to speak to one of our business recovery specialists.
