Earlier this year we highlighted the proposed changes in legislation to grant new powers to The Insolvency Service to target misuse of dissolution to close an insolvent company. The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 received no resistance from MPs and has now received royal asset and formally become as Act of Parliament.

What’s behind the change?

Prior to The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, the Insolvency Service didn’t have the power to investigate directors of companies which had already been dissolved. It could only look at those entering an insolvency process, or where the company was still live. This meant, unless someone objected to the dissolution application, directors who’ve inappropriately wound-up a company using dissolution may well have slipped through undetected. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 includes new measures meaning The Insolvency Service can retrospectively investigate the actions of a director.

Why now?

The concern is that company directors could misuse the dissolution process to avoid repaying Bounce Back Loans or other government-backed borrowings. At the height of the pandemic, the value of these loans was worth over £2bn. Understandably, if the government is covering the loan value in the event of non-payment from the borrower, they will want to ensure this is a genuine case of the company being unable to pay.

What if the right option is to dissolve a company?

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 is liquidated or simply dissolved. If a company is insolvent, there will be times when dissolution is the most appropriate form of action.

The issue arises, as with most things, when the process is abused. The dissolution process could be used as a method of fraudulently avoiding repayment of government backed loans, which has led to this new legislation being brought in.

Will my client be investigated if they dissolve the company?

We understand that directors who are dissolving their company might be concerned that they will automatically be under investigation. This isn’t the intention of the legislation and there will be genuine cases where dissolution is the right route to take.

What’s imperative is that you can evidence that dissolution was the right option, and that’s consulting with an Insolvency Practitioner is key. What to do with an insolvent company can be more complicated than it might first appear. It’s our role to help you and your client understand the rules surrounding business insolvency, which are complex, and to confidently conclude on the most appropriate action to take.

What to do if your clients are considering dissolving their company

If you have clients who are likely to become insolvent, then you should contact our team for a free initial meeting to discuss their circumstances. Call 0808 196 8676 or email help@trusolv.co.uk