Everything directors need to know
We’ll spell out exactly what has changed and what this means for directors and business owners of companies regarding their commercial rents and how they can approach closing their business down.
When the bill was first announced in August 2018, the Business Secretary Kwasi Kwarteng said: “We want the UK to be the best place in the world to do business and we have provided unprecedented support to businesses to help them through the pandemic.
“These new powers will curb those rogue directors who seek to avoid paying back their debts, including government loans provided to support businesses and save jobs. Government is committed to tackle those who seek to leave the British taxpayer out of pocket by abusing the covid financial support that has been so vital to businesses.
Stephen Pegge, Managing Director of UK Finance, said: “The ability to dissolve a company when necessary is a right reserved in legitimate circumstances where there are no outstanding creditors, however it can be open to abuse.
“The banking and finance industry therefore supports this legislation which will provide much needed powers to the Insolvency Service to help hold rogue directors to account by providing additional deterrents and easier enforcement of the rules.”
What does it do?
You can read the entirety of the law right here but the key measures that will affect the most companies are:
- More investigations into dissolved companies and their directors
Company dissolution or striking off is a cheap, efficient and effective way of closing down a dormant business or one that has no outstanding debt.
This hasn’t stopped unscrupulous directors from trying to close their company through this method and avoid their legal responsibilities.
The Insolvency Service is particularly keen to clamp down on so-called phoenix companies – which are businesses that dissolve to escape liabilities and debts before reforming as a new company, debt free, often with the same location, assets and directors.
The new bill allows investigations of directors of dissolved companies sometimes going back over a period of years to determine whether they were eligible to dissolve the company in the first place and if they discharged their legal duties as directors at the time.
- More disqualification orders
As a result of the expected increase in investigations, it follows that there will be more examples of bad behaviour uncovered by the Insolvency Service which will be punished through a range of sanctions including fines and the potential to be disqualified from serving as a director for a period of up to 15 years for the most egregious examples.
- Personal liability for company debts
A potentially worse sanction for directors is also included in the new law. This is the new ability for a director of an improperly dissolved business to have the outstanding company debt personally assigned to them to repay from their own funds.
Rent – deal or no deal for tenants?
Due to the generational disruption caused by Covid-19, a lot of commercial tenants haven’t paid their rent in full or even at all for the last year.
They have been protected by moratorium provisions introduced during the initial lockdowns but these are currently due to expire in March 2022 and latest estimates indicate that over a million tenants are in arrears to the collective total of £9 billion.
In order to circumvent the high probability of a wave of lease forfeitures and insolvencies, the new law introduces a compulsory arbitration process between the landlord and the commercial tenant.
The arbitrator is granted powers to grant relief to the tenant over the wishes of the landlord if necessary including a waiver of the rent arrears or payment deferments. The bill states that “the arbitrator should aim to restore and preserve the viability of the business of the tenant so as to preserve the landlord’s solvency.”
The introduction of arbitration can be seen as an attempt to get more landlords and tenants to agree repayment settlements before March with it acting as a last resort blacktop but as it is a brand new provision with no previous precedent it could have some unforeseen consequences. The government’s own impact assessment states that the outcome of an arbitration will be “wholly uncertain”.
This could lead some parties to refuse concessions until they see how the new law will function and there could also be question marks about the cost and length of the arbitration process too.
The other parts of the bill are concerned with the £1.5 billion of business rates relief being provided to some of the sectors hardest hit by the pandemic which had not previously been eligible for existing support linked to business rates.
This will be administered by local authorities who will set up the schemes on a local area basis for eligible firms to access the relief.
What’s hidden in the small print?
Chris Horner, insolvency director with BusinessRescueExpert thinks that while the law will bring some changes that will only be apparent later, there could well be an immediate effect in one area.
He said: “Once the full implications of these changes are considered by businesses then we could see some definite changes in the short term for sure.
“One thing to watch out for could be less dissolutions and more liquidations as directors under threat of investigation and being made personally liable for company debts consider their options and act accordingly.
“Striking off is an option that’s only available to businesses under a certain set of conditions. But even if a business was able to close this way, it would still leave them potentially liable for bounce back loan arrears, outstanding tax, VAT and other debts owed to other creditors.
“A liquidation is the only certain way to close a business permanently and draw a firm line under any debts the business owes.”
It feels almost in bad taste to discuss the critical opening weeks of 2022 when a lot of businesses are struggling to get through what should have been their busiest period of the year right now.
But they will be here sooner than you think and how a business owner or director handles these crucial days could be the difference between having a successful future or not having one at all.
We offer a free initial consultation for any company that is worried about outstanding bounce back loans, VAT arrears or any other debts the firm has accrued in the past two years or even earlier.
Once we get a clearer idea of where you are and what you’re up against then we’ll be able to recommend a range of options to choose from – usually more than you think there could be.
But this is only if you get in touch and do it soon because for some companies even delaying a few weeks will mean that it could be too late to save the business.