Dissolved companies: Closing the loophole

28 May 2021

Dissolving a company, instead of going through a solvent or insolvent liquidation process, is a perfectly legitimate way of shutting down a corporate entity. However, the insolvency and restructuring profession has raised concerns in the past that this route is used by some directors to avoid scrutiny of their behaviour, as dissolution does not involve examination of the dissolved company's finances by an external party such as an insolvency practitioner.

It is therefore very welcome to hear that the Insolvency Service will be granted new powers by the Government to "investigate directors of companies that have been dissolved, closing a legal loophole and acting as a strong deterrent against the misuse of the dissolution process", as part of the recently-announced Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill.

Rebalancing the scales

The change will mean that directors of dissolved companies will be put on a more equal footing with their peers at active and liquidated companies, where the Insolvency Service has existing powers to investigate potential wrongdoing, and to exercise sanctions against directors who have been found to have acted dishonestly.

The Government also hopes that the move will make it more difficult for directors to use the dissolution process to walk away from their company's unpaid debts, and to set up a very similar new company following the dissolution.

In the context of the billions in state-backed loans which were made available to businesses to help them deal with the impact of the pandemic, the Government's interest in cracking down on companies which attempt to evade their debts is clear and understandable, and will benefit the public purse.

It will also benefit other creditors -  from staff to suppliers - who are also affected by unpaid debts following a dissolution, and will help to crack down on fraud, by closing off a route by which investigations can be dodged.

An issue of resource?

This expansion of the Insolvency Service's powers is a positive step. We hope, however, that the Insolvency Service will be able to follow up all reports of potential wrongdoing on the part of directors of dissolved companies, as ensuring that serial fraudsters are not allowed to continue operating is an important part of protecting innocent counterparties.

Insolvency practitioners, looking into the conduct of directors of companies in insolvencies, are required to make a report to the Insolvency Service, to highlight any suspicions they may have about possible unlawful or dishonest behaviour by directors. R3's members have sometimes expressed frustration that not all of their reports - even where serious breaches of the law are suspected - are acted on.

While no Government department has infinite resources, it is clear that identifying and stopping rogue directors is an activity which more than pays for itself through averted losses, to the Crown and to other creditors.

With the Insolvency Service set to receive many more potential cases of dissolved companies to investigate, on top of its existing caseload, we hope that the Government's decision to expand its powers will be matched by an expansion of the resources available to it to gather evidence and shut down anyone abusing the dissolution process.

Collaboration, combination and progression

Closing any loophole that can be utilised by fraudsters is a positive step, and will help make the UK a better and safer place to do business. In conjunction with the proposed reforms at Companies House, the environment for rogue directors will, we hope, become trickier for them to operate in - which can only be good news for the rest of us.

We will continue to engage with the Government on the issue of fraud, and to encourage them to make more use of the investigatory powers granted to insolvency professionals, to help them tackle the scourge of dishonest behaviour.