On Wednesday 12th May, the UK Government announced the granting of new powers to the Insolvency Service, relating to company directors who dissolve their businesses and leave staff or taxpayers out of pocket. The Directors’ Disqualification Measure will allow the insolvency Service to be able to investigate directors of companies who have dissolved and are no longer in operation.
Previously to the measure being announced, there was a legal loophole which allowed dissolved company directors to fraudulently avoid the repayment of government backed loans given to businesses to support them during the Coronavirus pandemic. At present, the Insolvency Service has powers to investigate directors of live companies or those entering a form of insolvency. The measure will also help to prevent directors of dissolved companies from setting up a near identical business after the dissolution, often leaving customers and other creditors, such as suppliers or HMRC, unpaid.
If any wrongdoing, negligence or malpractice is found, directors can face sanctions including a ban of up to 15 years from acting as a company director in any format. Here’s all you need to know on the new measure:
What Are The New Insolvency Service Powers?
The Directors’ Disqualification Measure implements a policy first announced in August 2018. The government stated it would come into force when parliamentary time allowed. The measures, which will sit with the Secretary of State for Business Kwasi Kwarteng, is contained in the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill. These sanctioned powers are retrospective and will enable the Insolvency Service to also tackle directors who have inappropriately wound-up companies that have benefited from the Coronavirus Bounce Back Loan scheme.
This bill also delivers on the commitment to rule out COVID-19 related material change of circumstances (MCC) business rate appeals. This is due to the fact that market-wide economic changes to property values, such as from COVID-19, can only be properly considered at general rates revaluations.
The government also announced that they are providing £1.5 billion of funding to sectors which have suffered most economically over the pandemic, ensuring support is delivered to businesses in the most efficient way possible. Without this measure in place, it would allow for business rates appeals on the basis of a ‘material change in circumstances’. This could potentially lead to significant amounts of taxpayer support going to businesses who have been able to operate normally throughout the pandemic, whilst disproportionately benefitting particular regions like London.
Why Have The Government Introduced The Directors’ Disqualification Measure?
With COVID-19 causing a drastic downturn to global economics, whilst also unfairly benefitting many, the government plan to recoup some of the huge lending that has occurred throughout the last year. Government borrowing reached a new peace time high in the first quarter of 2021, equating to £303.1 billion, with March alone at £28 billion (the largest monthly borrowing on record). Because of this, bringing in these powers for the insolvency Service to investigate unscrupulous business owners has been warmly welcomed.
Kwasi Kwarteng stated, “As we build back better from the pandemic, we need to restore business confidence, but also people’s confidence in business – which is why we will not hesitate to disqualify directors who deliberately leave employees and the British 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.”
As well as this, Dr Roger Barker, Director of Policy and Corporate Governance at the Institute of Directors, said, “Company directors fulfil a central role in ensuring that their businesses are well governed. Although corporate dissolution may be inevitable in some cases, it should only be used as a last resort – after all other realistic avenues for protecting the interests of stakeholders have been exhausted. Using company dissolution as a mechanism for the evasion of a directors’ duties has no place in the governance of a responsible enterprise.”
We hope this has outlined to you exactly what the new Insolvency Service powers are and what the Directors’ Disqualification Measure entails. If you require any more information on any of the COVID-19 government schemes, loans and grants, or anything accounting related for that matter, please don’t hesitate to get in contact with us at Nordens where one of our trusted advisors would be happy talking you through your query.