There have been a great number of fraudulent claims for loans as a result of the Covid pandemic. In fact a recent commentator estimated that the numbers could run into £billions. With the government conscious that a large number of these companies might seek dissolution as a way of flying under the radar and avoiding the scrutiny that an insolvency process would bring, the new bill (that we first discussed in our blog in June 2021) is finally coming into force. It will change the way companies can be dissolved. If you or one of your clients is thinking of closing a business, we encourage you to take note of the changes.
For a significant number of companies who cease to trade (536,934 in the year 2019-2020 according to figures published by Companies House) dissolution seems a simple method of wrapping things up. The Company will be struck off the register and that would be the end of it. Nothing more for the directors to worry about.
Broadly speaking, the figures over the last 10 years have remained constant in respect of the type of dissolution, with around 50% being voluntary dissolutions, 40% compulsory dissolutions and around 10% as a result of insolvency – although of course in terms of profile it’s the insolvent companies that garner the most headlines. That means the vast majority (over 90%) of dissolutions don’t come as a result of an insolvency process.
This statistic has perhaps been an enticing one from the point of view of a director who doesn’t want the dealings of their company to come under any scrutiny. Of course the majority of companies are dissolved without any significant liabilities, and there’s most likely nothing to report on.
However, the government is well aware that there have been many fraudulent claims for loans as a result of the Covid pandemic, and a large number of these companies might seek dissolution as a way of flying under the radar and evading the proper scrutiny that an insolvency process would bring.
To this end, The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill received Royal Assent on the 15 December 2021, and will come into force on the 15 February 2022.
There are 2 ways of dissolving a company outside of an insolvency process: compulsory dissolution and voluntary dissolution.
A compulsory dissolution (also called compulsory strike off) will come about if Companies House (CH) believes that the company is no longer trading – for instance:
- Company documents are outstanding and CH has had no response to letters
- Letters sent by CH are sent back undelivered
- The company has no directors
CH had suspended compulsory strike offs because of the pandemic, but these have now been reinstated.
Voluntary dissolution is where the directors of the company apply to CH for the company to be dissolved. It must satisfy the following criteria:
- It hasn’t traded or sold off any stock within the last 3 months
- It hasn’t changed its name within the last 3 months
- It isn’t threatened with liquidation (for instance a petition to wind up the company has been presented)
- It has no agreements with creditors (a Company Voluntary Arrangement is in place)
What does the new legislation mean?
From 15 February 2022 the Insolvency Service will now have the power to investigate the conduct of a director of any company that is dissolved without becoming insolvent.
This power can be exercised for up to 3 years following dissolution.
If the Insolvency Service (IS) finds that the actions of a director have been delinquent then they will seek a Directors Disqualification Order through the court process. Additionally, if the IS finds that there has been a loss to creditors of the company then a Director Disqualification Compensation Order can be sought, effectively making the director personally liable for some or all of the company’s liabilities.
Clearly this new legislation is going to affect a number of directors who beforehand would have just allowed their company to be struck off.
It is therefore imperative that any director faced with the prospect of a dissolution takes appropriate advice from an Insolvency Practitioner. Doing nothing is no longer the safe option it once was.
It won’t be the case that every director who took out a loan during the Covid pandemic will be delinquent, and many took out loans in order to attempt to save their businesses from insolvency. No one is expecting them to have held a crystal ball while making these difficult decisions.
If you think that your business might be at the end of the road, or aren’t sure about whether to continue to trade, please talk to us and we can guide you through the various options available to you.