Parliament is pushing the move following fears some directors may try to avoid repayment of Government-backed funding, such as Coronavirus Business Interruption Loans (CBILS) or Bounce Back Loans (BBLS), by dissolving their company rather than enter a formal insolvency process such as liquidation.
At present, only live companies – or those going through a formal insolvency process – can be investigated by the Insolvency Service for allegations of fraudulent trading. Directors can face several penalties and sanctions if they are found guilty of misconduct. This includes being made liable for company debts or being disqualified from acting as the director of a limited company for up to 15 years.
Dissolving a company through the strike-off process is not classed as a formal insolvency procedure meaning that directors can avoid investigation if they can successfully close their company in this way.
What is the dissolution process for companies?
The dissolution process is designed for those companies which are not threatened with an insolvency procedure and haven’t been trading for the preceding three months. However, some directors have been using this as an alternative to formally liquidating their company.
If passed, this law, which has just had its first reading in Parliament, will not only stop directors from dissolving companies with active liabilities in the future, but will also be retrospectively. This means the Insolvency Service has authority to investigate dissolved companies that still have outstanding Government-backed coronavirus loans.
What are your options if your company faces insolvency?
For a company with existing liabilities – whether it’s a Government-backed COVID-19 loan or not – formal liquidation is the preferred closure route for all parties. Not only does liquidation ensure outstanding creditors are treated fairly, but it also shows directors are willing to honour their legal obligations when they become aware their company is insolvent.
If the company has a viable future, despite any current issues, there are a range of rescue and recovery processes which a company can take to improve its fortunes. These include a Company Voluntary Arrangement (CVA) to proceed negotiations with outstanding creditors; or Administration, which provides time while a business is restructured.
Need more help?
At TaxAssist Accountants we work with a number of specialist insolvency partners to help directors explore the available options should they are face with financial challenges. For more information on this topic please call Begbies Traynor on 0800 056 0444 or email us at [email protected].
Date published 25 Jun 2021 | Last updated 6 Jul 2021