Queen Elizabeth II 1926 - 2022

Directors who dissolve companies to evade debts are targeted

Unscrupulous owners of failing businesses who seek to avoid repaying their loans face lengthy bans, stiff financial penalties and in more serious cases, prosecution.

The Bounce Back Loan scheme was released in May 2020 and business owners could borrow 25 per cent of their annual turnover or 25 per cent of their expected turnover for the upcoming year, up to £50,000, so long as that money was put into ensuring their business survived.

The pandemic saw huge numbers of loans taken out with many businesses seeking to avoid their repayment by ditching the business and starting again with no obligations.

Previously directors dissolving a limited company as a legal entity were able to walk away with no further financial obligations, but new rules are seeking to combat this issue.

Powers for Insolvency Service

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act was introduced in December last year to ensure that any company which is dissolved to avoid debts, can now be investigated by The Insolvency Service.

The legislation extends the Insolvency Service’s powers to investigate and disqualify company directors who abuse the company dissolution process.

Four directors were penalised recently for dissolving their companies without repaying Bounce Back Loans.

What are the penalties?

Between them, they were banned for between seven and 12 years and they cannot be a director of any company registered in the UK. Bans could be up to 15 years.

In financial terms, they face the prospect of Compensation Orders being issued against them to recover the cash they borrowed, which ranges between £15,000 and £50,000.

They also cannot be a director of an overseas company that has connections with the UK or be involved in forming, marketing or running a company.

Review of insolvency framework

This new action comes after the Government launched a call for evidence in July seeking stakeholders’ views and evidence on the personal insolvency framework and whether it serves the needs of debtors and creditors in the 21st century.

The Government is seeking views and evidence on the overall purpose of the framework, how it currently supports those in financial difficulty and how it is funded.

Companies facing financial problems should seek professional advice about what options may be open to them and avoid falling foul of the law.

For help and advice on related matters, contact our team today.

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