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Kwarteng’s crackdown: directors who dissolve companies to evade debts could be disqualified up to 15 years

Business Secretary Kwasi Kwarteng
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The UK Insolvency Service has been granted new powers to tackle unfit directors who dissolve companies to avoid paying their liabilities. But the news should not put off legitimate businesses that want to close up shop. They just have to make sure they have no business liabilities left unpaid.

The new powers came into effect in December to investigate directors that dissolve their businesses to evade their debts and liabilities, otherwise known as phoenixing, which according to insolvency practitioners Clarke Bell is a “liability evasion tactic” that has been on the government’s radar for a while.

The new legislation extends the Insolvency Service’s powers, on behalf of the Business Secretary, to investigate and disqualify company directors who abuse the company dissolution process.

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act will also help tackle directors dissolving companies to avoid repaying Government-backed loans put in place to support businesses during the Coronavirus pandemic.

“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,” said Business Secretary Kwasi Kwarteng.

The Business Secretary said that the Government is committed to tracking down those who seek to leave the British taxpayer out of pocket by abusing the covid financial support that has been so vital to businesses.

The Insolvency Service have: what powers does it have?

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

Put simply, the Insolvency Service is entitled to investigate any director or business that enters insolvency, or a business for which they have specific instructions, according to Clarke Bell. This includes businesses that enter liquidation or administration.

“Directors that are found in breach are likely to face some of the aforementioned penalties,” said Clarke Bell in a report.

“With over 412 phoenixing cases in September, it is hoped that this new rule will help reduce the likelihood of further cases, in addition to equipping the Insolvency Service to deal with them should they arise. Time will tell whether the rule will have the desired effect,” stated the report.

This Act extends those investigatory powers to directors of dissolved companies and if misconduct is found, directors can 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 the commitment to rule out COVID-19-related changes as grounds for material change of circumstances (MCC) business rate appeals. This is due to the fact that market-wide economic changes to property values, such as from COVID-19, can only be properly considered at general rates revaluations.

To support this, the government is 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 spelled out the support local authorities will set up for their local schemes through which businesses will be able to access relief.

Stephen Pegge, Managing Director of UK Finance, said that the ability to dissolve a company when necessary is a right reserved in legitimate circumstances where there are no outstanding creditors, however, it can be open to abuse.

Stephen Pegge, Managing Director of UK Finance

“The banking and finance industry, therefore, supports this legislation which will provide much-needed powers to the Insolvency Service to help hold rogue directors to account by providing additional deterrents and easier enforcement of the rules,” said Pegge.

Though the new rule might seem like it poses an obstacle to dissolution as a whole, you still have the right to dissolve your business in legitimate circumstances. This extends to circumstances that do not involve businesses with outstanding creditors. If you are unsure where you or your business stands, consider consulting a professional for advice.

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