Directors disqualifications fell but more investigations set to get underway
We’ve previously written about what the changes contained in the bill mean for directors of companies that have closed down, including ones that closed with outstanding CBILS or bounce back loan debt.
Dissolving a company is a simple and relatively quick and cost effective way of closing down a business but only under a strict set of circumstances.
We’ve covered at length the potential for the defaults from unpaid bounce back loans to run into the billions so the new law is a sign of how seriously the government is preparing to take the problem and what this means for directors.
The only current way available for creditors unhappy with the conduct of directors of a dissolved company would be to apply to have the company restored so they could then apply to have it placed into liquidation and ask the liquidator to investigate the conduct of directors.
This is a complex, time consuming and potentially expensive process which is why it is so rarely pursued. The new law simplifies matters and grants new powers to The Insolvency Service to investigate the conduct of directors of dissolved companies without resurrecting the business.
According to the latest available statistics from The Insolvency Service, the number of company directors disqualified fell to 972 for 2020/21, down 24% from the 1,280 in 2019/20.
The fall will be partly due to various temporary support mechanisms and measures brought in to reduce company insolvencies such as statutory demands and winding up petitions being suspended and the suspension of personal liability arising from wrongful trading.
The average length of directors disqualification held steady at around six years.
Disqualifications can happen for actions uncovered by liquidators including attempting to defraud HMRC (which purposefully avoiding repaying bounce back loans and CBILS would be classed as), falsifying records and transferring money out of an insolvent business.
In the early stages of the pandemic, HMRC gave as much forbearance as they could to delinquent companies as it was a unique situation but as the economy begins to open up and more businesses begin trading under more recogniseable circumstances, they will begin to step up their recovery actions.
Combined with the new legal powers granted to The Insolvency Service, which the government expects to be used to generate a return, the number of directors’ disqualifications will be almost certain to increase in the next 12 months.
Chris Horner, Insolvency director with Business Rescue Expert, acknowledges this could be a nervous time for some directors but wants them not to worry unnecessarily.
He said: “Any director that liquidated their company through a Members Voluntary Liquidation (MVL) or a Creditors Voluntary Liquidation (CVL) has got nothing to worry about. I need to reiterate that as strongly as I can.
“The new legislation is primarily aimed at unscrupulous directors who have tried to avoid repaying creditors and dissolved their companies to do it.
“Done properly and for the right reasons, dissolution is the natural endpoint for many businesses and entirely correct – but using it to dodge your debts is not on.
“It damages a perfectly good process by association, and it would be great to see The Insolvency Service punish those that have deliberately set out to defraud.
“Businesses that have outstanding bounce back loans or CBILS borrowing and have to close shouldn’t worry unnecessarily either.
“As long as they have documentary or other evidence that outlines what the loan was for, the motivation behind the application, how the company dealt with the pandemic and restrictions and what the money was spent on, they will be in a good position to confidently answer any questions they may be asked in future.”
It’s a strange time right now for everybody – not just directors and business owners.
It feels like a half-way house between eras, lockdown/post lockdown or pandemic/post pandemic, however you would describe it, we’re definitely changing from one set of attitudes, actions and sentiments to another.
While these changes play out, directors might naturally be concerned, not only for the future of their business but also about the decisions they’ve had to take for the good of the company during the past year and a half.
We’ll be happy to set their mind at rest regarding their own actions and also be able to outline their immediate options to improve their short-term prospects.