How many times have we heard that a Company that has outstanding liabilities has been dissolved by the Director at Companies House without going through a formal Insolvency process and then the Director appears to have successfully set up a new Company the following day?
Not only was dissolution a cheaper option, but there were no investigations into the Directors – as dissolving a company is not a formal insolvency process. If any investigation or action was to be taken against the Directors, the only option was to restore the Company to the Register and then Petition to place the Company into compulsory liquidation, which is both costly and time consuming.
Change is coming
However, things are about to change! In light of concerns over fraudulent evasion of liabilities in regard to Covid-19 loans, the Government announced on 12 May 2021 that the Insolvency Service will be given powers to investigate Directors of companies that have been dissolved, affectively, closing the loophole that is currently in place.
Measures included in the Bill will be retrospective and will allow the Insolvency Service to take to hand Directors that have wrongly dissolved companies and may have benefited personally from Bounce Back loans and other Government funding. Apart from financial penalties, Directors could also be banned from holding office for up to 15 years.
The Insolvency Service has received reports of a number of corporate insolvencies in which there appears to have been abuse of the various COVID-19 Government financial support schemes, such as:
- Bounce Back Loans obtained, and the proceeds removed by the Directors for their personal benefit in close proximity to the company entering into formal insolvency proceedings
- Using the Coronavirus Job Retention Scheme for purposes other than paying employees on furlough, or claiming support for employees who continue to work contrary to the terms and conditions of the scheme
- Providing false information in connection with any application for a COVID-19 support scheme
Any matters of suspected fraud in relation to HMRC-administered coronavirus relief schemes (such as the Job Retention Scheme) will be directed to HMRC so that they can consider criminality or personal liability.
Whilst a majority of business owners have utilised Government funding in a responsible manner for the purpose that they were intended, reports have shown that up to 10% of the amount claimed for furloughed individuals were claimed whilst staff were still working. Furthermore, there are concerns that there has been a been deliberate abuse of Bounce Back Loans, with estimates that between 35% and 60% will not be re-paid. Whilst I consider this estimate to be quite high, I anticipate that there will be a substantial burden on tax payers.
Increased Power to Tackle Fraud
In the recent budget it was announced that HMRC are to receive significant funding and staff to address possible fraud and with the new legislation, the Insolvency Service also now have increased powers.
Whilst initially it is anticipated that HMRC will target the worst offenders, Directors should prepare themselves for a possible HMRC compliance checks going forward.
Dissolution was never designed to be a formal insolvency process. As a Company Director, if you have any concerns in the way that Covid-19 funding has been utilised by your business or you are struggling to pay your debts as an when they fall due, there are both formal and informal options to consider – and speaking to the right people shows that you, as a Director, are taking responsible action. Initially you should speak to the team at Kingston Burrowes so they can get a full understanding of your position and if necessary, they will put you in contact with a Licensed Insolvency Practitioner to assist you further.
Guest post contributed by Tony Bayliss of RBW Restructuring & Insolvency (01372 711050)