What to do with an insolvent company can be more complicated than it might first appear.

It’s insolvent, stick it into liquidation.

But what if the company only has liabilities and no assets at all? What if the directors aren’t in a position to contribute to pay for the liquidation?

If there’s no assets and no prospect of any realisations which might enable a distribution to the creditors, then the outcome to the creditors will be the same whether the company’s liquidated or simply dissolved.

The issue arises, as with most things, when the process is abused. The dissolution process has been used as a method of fraudulently avoiding repayment of government backed loans, given to the businesses to support them during the Coronavirus pandemic.

Targeting misuse of dissolution

Currently, the Insolvency Service only has the power to investigate directors of live companies or those entering an insolvency process. It doesn’t extend to dissolution. Unless someone objects to the dissolution application, it may well slip through undetected.

The new measures included in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill are retrospective and will enable the Insolvency Service to also tackle directors who’ve inappropriately wound-up companies which have benefited from Coronavirus Bounce Back Loans.

Along with other recent legislative changes, it’s all about transparency and perception. Restoring people’s confidence in business – confidence the directors are acting responsibly.

Dissolution might still be the appropriate option, but directors need to be aware the Insolvency Service will now have the power to investigate them. The measures are in part to deliver on the promise to combat Bounce Back Loan fraud announced in the 2021 Budget.

The new measures aren’t in place to attack those who’ve used the support in the way it was intended. They’re there to combat those who’ve abused it.

Only time will tell how high the bar will be for challenging fraudulent use of the government support.

What’s clear is that there will be a push to recover government backed lending. At the very least consideration needs to be given to the pros and cons of each option. Taking advice on your personal situation’s more important than ever. Speak with TruSolv today on 0808 196 8676.