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New Insolvency Service powers to deter debt-evading directors

After receiving Royal Assent on 15th December 2021, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act
enforces greater investigative powers for the Insolvency Service. First announced back in 2018, these new powers are only just coming into effect now.

Previously, the Insolvency Service could only investigate current directors of firms becoming insolvent. Now it has the power to look into directors after the dissolution of a company. Rather than escaping their debts, the service can disqualify directors if they find evidence of misconduct.

Which new powers does the Insolvency Service have?

Unfortunately, some directors abuse the dissolution process to avoid paying their company’s debts. This is known as ‘phoenixing’ – when a director dissolves their own company to evade liabilities, then goes on to become a director elsewhere. They may even repurpose their business assets and use them to start another company, all while dodging their responsibilities to pay previous creditors.

‘Phoenixism’ is an even bigger concern for the government these days, because some directors may use this method to avoid paying back COVID-19 business support loans. This has been a big factor in signing off on these new powers. Not only can the Insolvency Service look into companies entering insolvency, but it can also investigate former directors of dissolved companies, and even active ones.

‘Gross misconduct’ covers many director behaviours, not just failing to pay debts. Activities that the Insolvency Service may investigate include misappropriating company assets, taking money from the business for personal use, pursuing unwarranted financial risks with creditors’ money, and defrauding creditors. If it finds evidence of wrongdoing, the director will face legal consequences.

What are the Insolvency Service sanctions for director misconduct?

As the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act allows the Insolvency Service
to investigate former directors of dissolved companies, those found guilty of misconduct can be held accountable regardless of when the misconduct occurred. The service may ban a fraudulent director from holding another director position at any company for 2 to 15 years.

In severe cases, including repeat behaviour or breaking of a ban, the Insolvency Service can take the director to court for prosecution. The Business Secretary could also seek compensation through such court cases, giving defrauded creditors an opportunity to recover their losses. Any director found resuming activities could risk going to prison, or becoming personally liable for company debts.

Rather than aiming at large corporations, the legislation is targeting small to medium enterprises who may be tempted to ‘game’ the system. Whereas directors may have gotten away with ‘phoenixing’ before, perhaps even multiple times, the retrospective investigatory powers will eventually catch them out. They will hopefully be an effective deterrent for current directors.

Will these changes to the Insolvency Service affect business rates?

Alongside targeting former directors, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act also affects business rate appeals. Companies cannot use COVID-19 as the basis of a ‘material change of circumstances’ business rates appeal. However, the government is providing a £1.5 billion business rates support fund through local authorities for certain sectors.

For more information about this Act, consult the UK Parliament website or the government’s official online press release. Should you need professional assistance with corporate finance, including company formations, mergers, and succession planning, then get in touch with GBAC. Our skilled accountants in Barnsley are just a phone call or email away via 01226 298 298 or info@gbac.co.uk.