New legislation is currently in the third reading stage in the House of Lords and is on track to receive Royal Assent in the near future.
At the time of writing, a new piece of legislation is currently in the third reading stage in the House of Lords and seems to be on track to receive Royal Assent in the near future. This law, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, will implement important amendments to the prevailing system for insolvency and director disqualification. Company directors will currently not be investigated by the Insolvency Service if their business is dissolved without entering into a formal liquidation process unless said business is later restored to the register at the Companies House. This new legislation, however, looks to close this loophole and grant the Insolvency Service the power to investigate directors as if their dissolved company had undertaken a formal insolvency procedure. This means that directors can be disqualified if they are found to have abused certain schemes like limited liability and the voluntary dissolution process.
What are the advantages of voluntary dissolution?
Voluntarily dissolving or ‘striking off’ a company is an option open for directors that makes for a simpler means of closing down a business compared to a formal insolvency process. This is done by sending an application form called a DS01 and a small fee to the Companies House, who will strike the company’s name off the register after two months should it meet the necessary criteria for voluntary dissolution. This process, however, is currently open to misuse by directors who may look to pursue a process known as ‘phoenixism’.
What is phoenixism?
Phoenixism refers to an exploit through which directors will dissolve their business along with all of its debts and liabilities in order to go on to start a new company that fulfils the same purpose whilst lacking the liabilities that the previous one had amassed. It’s important to note that phoenixism is a risky tactic that may only act as a short-term solution. It may well be tempting for the initial financial improvement, but a formal liquidation procedure would nearly always leave the director in a better position, due to the business’ assets being identified and sold in order to satisfy the company’s outstanding creditors.
Why is the government now looking to reform the dissolution process?
Due to certain systems that were drawn up in response to the COVID-19 pandemic, there is growing concern that the dissolution process is currently left open to being taken advantage of by directors looking to swerve repaying state-sanctioned borrowings, most notably through the Bounce Back Loans Scheme. From the government’s perspective, bearing in mind that taxpayers could look to lose billions of pounds due to misuse of Bounce Back Loans, this is a significant public concern that needs to be addressed, and allowing directors to simply clear their hands of any debts and liabilities through phoenixism is an abuse of government money that hurts the taxpayer.
What does this mean for directors?
Directors will have to be wary should the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill pass through Parliament, as the increased power granted to the government will mean that the Insolvency Service will be able to disqualify any directors who are found to have abused the dissolution process. The bill will also apply retrospectively, so this could even affect directors who struck off their business before the legislation had come into force, and it is also not required for a company to be restored to the register in order for a director to come under investigation, as is currently the case. Disqualified directors may find themselves required by Court orders to reimburse any creditors who were deprived of the appropriate payments as a result of their actions.
As such, it is now more important than ever that directors are properly informed on the best option available to them when considering whether they should dissolve their business or enter into a formal insolvency process. If you are looking for advice on closing down your business, contact Voscap today on 020 7769 6831 or email help@voscap.co.uk to speak to one of our experts.
