For some time now it has been widely known within the business community that there are a number of unscrupulous directors – those who have probably done some dodgy things in their company that they’d rather not admit to – who instead of winding up the affairs of their company properly using the services of an insolvency practitioner, try to dissolve the company instead. In reality, why wouldn’t you? It’s a simple form and an £8 fee if you submit it via the online process, or a heady £10 if you use the paper form.
The process is set out here, and unless a creditor regularly trawls the adverts in the London Gazette, who is ever going to know about it? Some proposed dissolutions do get objected to, mainly by HM Revenue & Customs, but the large majority do not. Once a company has been dissolved, there is a significant cost to undertake a Court application to attempt to get the company restored to the company register, and this is why it is considered to be a lacuna.
Thankfully, the government has finally taken steps to make the dissolution route less attractive to directors who are seeking to abuse the process. Last month it announced new powers that it was giving to the Insolvency Service to investigate directors of companies that have been dissolved. The aim is to close a legal loophole, and the government hopes that it will act as a strong deterrent against the misuse of the dissolution process.
This has all come about as a reaction to a few company directors that dissolved their present business only to then restart in a different name, most likely in a bid to avoid repaying government backed financial support, such as the Bounce Back Loan or HMRC arrears.
With so many businesses still facing tough times, paying back a loan can add extra unwanted pressure, but those directors who have found a solution by dissolving their company in the hope of avoiding their actions being investigated, will hopefully think twice before doing so.
What Will Happen
The government has given this power to the Insolvency Service to investigate directors of companies to track down why the business is being dissolved. This power also includes other relevant sanctions, such as the disqualification from acting as a company director for up to 15 years.
The new measures will not only identify directors that are falsely closing their business, but it will also help to prevent directors of dissolved companies from setting up a near identical business after the dissolution. When this happens it often leaves customers and other creditors unpaid.
In the government PR that was sent out about this, it was stated that without these measures, confidence in UK businesses may suffer. This legal loophole had before enabled directors to deliberately leave their employees, suppliers, and also taxpayers out of pocket. Some people actually found a way to avoid their responsibilities as business owners, but the government now wants to make them accountable.
Corporate dissolution should never be deemed as a viable solution for a business. It should be the last thing that is considered when all other options have been exhausted. Simply using this technique to avoid paying back a loan – a loan that many other businesses across the UK heavily relied upon to get through these tough times – is not acceptable, and I praise the government for giving the Insolvency Service these new powers.
If a director is struggling, then I would urge them to seek proper professional advice and explore all their options. These new powers are no longer a simple ‘get out of jail free’ card. The consequences could severely affect how you make an income for a long time in the future.