New bill targets fraudulent company dissolution

Given the speed at which the pandemic upended the UK economy, financial support was given on a ‘trust, but verify’ basis. The government has signalled it will be doing more of the latter as the UK moves into recovery.

The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, introduced earlier this month, will give the insolvency service the ability to investigate directors of companies which have been dissolved to determine if it was done to fraudulently avoid repayment of outstanding debt.

“This Bill gives the Secretary of State the ability to investigate and prosecute directors of companies which should have entered an insolvency process but instead were dissolved”, said Nicky Fisher, deputy vice-president at R3, in a written response.

Over the past year the UK government has introduced numerous support measures to help businesses survive through a period of unprecedented economic uncertainty. One such initiative was the Bounce Back Loan scheme (BBLS), which only stopped accepting new application at the end of March. The BBLS allowed firms to borrow up 25 percent of their annual turnover up to £50,000. No interest or fees were charged for the first 12 months but the interest rate going forward is set at 2.5 percent.

The powers the bill would provide to the insolvency service would be retroactive and would look at firms which were dissolved but had unpaid debt to creditors like suppliers, HMRC or who had taken a BBLS loan.

Investigation into BBLS fraud will be of special interest to the government because they are 100 percent underwritten by them.

If a company can’t pay back its BBLS loan, it will be the UK taxpayer who would be liable to pay but Fisher added banks would use their normal channels to try to recover the debt first.

“Only if the debt can’t be recovered will the Government step in.”

“The banks will have to try and enforce any debts they are owed before the Government will cover the cost of any loan amounts that could not be recouped – and every bank will have a policy on how they do this.”

There is some concern on whether the insolvency service would have enough resources to conduct investigations into both dissolved and insolvent firms

“One key question is whether the insolvency service will have the resource available to conduct these investigations in addition to those they already carry out in respect of directors of insolvent companies”, says Fisher.

“It’s important that the former doesn’t come at the expense of the latter.”