The government has announced a new bill that will allow HMRC and The Insolvency Service to go after directors who dissolved their companies improperly leaving outstanding debts, including bounce back loans or tax.
The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill will allow retrospective investigation and action to be taken against directors and can lead to disqualification and personal liability if they are found to have dissolved their company with outstanding debts.
For the first time, authorities will have the power to investigate company dissolutions and strike offs retrospectively to make sure they were completed properly.
The Business Secretary Kwasi Kwarteng said: “We need to restore business confidence and people’s confidence in business.
“This is why we won’t hesitate to disqualify directors who deliberately leave employees and the taxpayer out of pocket.
“We are determined that the UK should be the best place in the world to do business. Extending powers to investigate directors of dissolved companies means those who have previously been able to avoid their responsibilities will be held to account.”
The sanctions include fines and a disqualification of up to 15 years from being a company director.
Should you be worried about bounce back loan fraud?
First announced in the Budget earlier this year, the measures will be introduced in parliament soon before passing into law.
Chris Horner, Insolvency Director with Business Rescue Expert, said: “Dissolving or closing down a company is the natural endpoint of the business life cycle and can finally occur for many reasons.
“Directors who thought it would be an easy way to avoid repaying bounce back loans or other debts should now be rightly concerned because for the first time, The Insolvency Service and HMRC will be able to investigate the circumstances of their dissolution to make sure it was completed properly.
“Directors who liquidated their business properly have nothing to worry about - it’s those that tried to sneak their dissolutions under the wire that will be anxiously reading the headlines.
“There were over 415,000 company dissolutions in 2020 alone, so there are a lot of potential cases to be investigated almost immediately.
“It will also force directors planning to close down to look at their liquidation options more closely as the proper method to end their business rather than taking their chances with a risky dissolution.
“These measures will ultimately create a fairer, more level playing field and will also be better for the treasury as we expect tax receipts to be higher and more outstanding bounce back loans to be recouped as a result.
“They might have other options available to them but if they are determined to close down then we can let them know the right way to do it from the start.
“We’re also happy to talk to any director that’s nervous about any consequences of their dissolution although the majority will have nothing to worry about.”
Some issues can be addressed relatively simply while others that require professional insolvency services such as CVAs and administrations can necessarily take a little longer.
One new thing we’re going to do in 2021 is to use some of these inquiries as examples and answer them publicly as well as we can.
Not only will it help demystify the sometimes opaque world of business and insolvency advice but it could also give you some food for thought if your business is going through something similar.
This week’s question: “Can the sole director of a company resign? And if so, what happens to any debt?”
Being a director has extra responsibilities above regular staff and shareholders.
They have legal responsibilities and duties they have to carry out and while they can leave a business, there’s still some steps they have to follow - they can’t just walk out of the door with their bags packed. These fiduciary duties are defined under the Companies Act and there is a risk of significant personal liabilities if these duties are not complied with.
In a limited company they should put their resignation in writing and send copies to any other directors or shareholders. They don’t have to divulge any reason but they are required to state the date the resignation takes effect.
They also need to inform Companies House through a TM01 form so they can update their records accurately.
While this will be the end of their official association with the company, their conduct may be investigated if the company subsequently enters an insolvency procedure within three years of their departure and any evidence of malpractice is discovered.
This could potentially lead to disqualification from being a director for a period of years if convicted. Similarly, they’ll still be held jointly and severally liable for any personal guarantees given while a director if the company can’t repay them as well as any further losses as a result of resigning from the company in lieu of dealing with the company's affairs.
In short we strongly advise against trying to walk away from a company, if you are the sole director, given these risks.
We asked Business Rescue Expert’s Insolvency Director Chris Horner, a licensed insolvency practitioner, what the criteria was for sole director resignation.
He said: “If they’re also the sole shareholder of the business then they are deemed to remain in control of the company. They are effectively still a director even if they formally resign.
“The debt will also remain with the company and won’t disappear. If the debt is of a nature that it will continue to increase, this is an even bigger risk for the director.
“What happens next depends on their intentions. Legally a company requires at least one director to continue to operate so they would either have to find a replacement, willing to act as director; look to sell the business to someone who can resurrect the business or look at closing the company.
“If the concern is the company cannot realistically meet its obligations and pay its debts, the latter would be the appropriate route and a Creditors Voluntary Liquidation (CVL), would probably be the most efficient way of closure. If the concern on going down this route is the cost, there are a number of options to effectively fund the liquidation”
We hope this gives you a little more clarity surrounding the position of directors and what they can do if they want to extricate themselves from a company but we would always recommend getting professional advice before making any hasty decisions and acting on them.
There may be some advantages or benefits available that you don’t know about or could access if you chose other methods of proceeding.
We can quickly get to understand your situation more clearly and be able to advise appropriate, effective and efficient actions you can take - quickly.
However, directors of limited companies have found themselves caught between a rock and a hard place when it comes to accessing support for themselves.
If you run a limited company business and receive some of your earnings through a PAYE scheme, then good news - you should be eligible for the government’s employee furlough scheme, the Coronavirus Job Retention Scheme (CJRS) for the employed.
This scheme entitles employees, which you technically are if you receive PAYE, to 80% of earnings that are received via PAYE up to a cap of £2,500.
When it was launched on March 23rd 2020, it was for a minimum of three weeks up to a maximum of the end of June. This has recently been extended to the end of July at 80% of earnings with a reduced level eventually being introduced along with a current final cut-off date at the end of October 2020.
To be eligible, the employee must have been on the payroll since 19 March 2020.
The trouble for many directors of smaller limited companies is that they only receive a proportion of their pay through PAYE - on average only £8,000 to £12,000 per annum (approx. £600 to £1,000 per month). Where applicable, other monies are drawn as dividends on top.
While in normal times this makes sense and is tax efficient, these aren’t normal times.
The CJRS does not count dividend payments as salary so only remuneration drawn through PAYE is counted in any furlough calculation.
This means that directors will only be entitled to 80% of this amount every month they are furloughed, not their full regular amount.
Critically, it’s also a precondition of the furlough scheme that any furloughed employees cannot work for the business during the furlough period.
This is in unfortunate contrast to the self-employed scheme which does allow self-employed directors and owners to work whether essential or at home and still benefit from the self-employed grant although the payments won’t begin until June.
To access the self-employment scheme, you must have been self-employed at anytime during the 2018/2019 tax year as HMRC will use this and previous filings to make any assessment of entitlements.
Limited company directors receiving any part of their salary through the company PAYE scheme are not considered to be self-employed under these circumstances and won’t be eligible for the Self-Employment Income Support Scheme.
You might be interested in another article where we examine ‘Should directors furlough or make themselves redundant’
There might be future overhauls of the tax system to address some of the issues that will appear in the next few months but there won’t be anything forthcoming in the near term.
What are your options?
Your business may be able to access some additional funding or support through the various grants, loans and relief schemes that government has announced to date.
Essentially the key announcements are:
What if I can’t make it work? - The worst-case scenario
If the coronavirus and lockdown means your business isn’t viable moving forward and your only real option is to stop trading and close it, then you do have options available.
Get in touch with us today and one of our team of expert advisors will arrange a free initial consultation with you to go through what they are.
They can review your situation and work out with you what the easiest and most stress free course of action will be.
Additionally, If you’ve been receiving some salary through your company’s PAYE and have been employed by the company for more than two years, then you’d be entitled to redundancy pay if the company subsequently goes into liquidation.
Our friends at Redundancy Assist will be able to talk you through everything you can claim.
And why not? In the white heat of running a company in these unprecedented days, directors might forget that they are employees too and just as lawfully entitled to redundancy pay, owed holidays and pay arrears as anybody else.
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The companies and people that will have the best chance of thriving and surviving in the future will be the ones who are pragmatic in these next few weeks - even if it means taking action they have previously eschewed for whatever reason.
If you take you and your business’ future seriously then start today by catching up with all the information in our special Coronavirus business support section and getting in touch with us to act on it.
