Much has been reported about new legislation currently being proposed in Parliament. It aims to prevent directors from simply striking off their company to avoid debt, investigations and prosecutions including disqualification.
In this guest post, Licensed Insolvency Practitioner, Tom Guthrie, explains what this potential bill could mean and the implications for the directors of limited companies.
The practicalities to strike off a limited company from Companies House
In essence there are two ways of bringing the life of a limited company to an end:
1. An insolvency process (most often a liquidation or “winding up”) which leads to dissolution or;
2. In many cases, a strike off (another term for dissolution) without a prior formal insolvency.
When a company ceases to file returns with Companies House, they may decide to “strike it off” the record and so keep the register clear of unwanted, redundant companies which serve no useful purpose.
A director may apply for a strike off when the purpose of the company has been fulfilled, or its course has been run.
Unfortunately, some directors apply for a strike off when they shouldn’t and others fail to comply with Companies House requirements in the hope that their company will be struck off for them.
The cost of restoring a company to the register will deter many creditors from undertaking this process in the hope that they can either recover assets abandoned in the company, or to pursue the director(s).
How the government are looking to alter the striking off application process
The snappily titled “Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill” is currently working its way through parliament. It seeks to prevent directors closing a company via a dissolution process without being investigated for wrongdoing or malpractice.
This is something that is believed to be more likely, just at the time when the government are hoping to recover bounce back and other loans, or reviewing how other monies (such as the furlough scheme) extended to companies during the pandemic, have been misused (at an estimated value £3.5bn).
The new measures could grant the Insolvency Service power to investigate the conduct of directors. If any are found to have acted inappropriately, the directors could face repercussions such as being personally liable for company debts, or being disqualified to act as a director for up to 15 years.
In addition to identifying, and challenging, potential wrongdoing the legislation is intended to prevent directors from simply setting up identical new companies having left customers, employees and creditors, including HMRC, unpaid.
How the route to dissolution is still open
The dissolution route is when the director(s) of a company completes a DS01 Form and files it at Companies House. Once filed, Companies House will advertise in the Gazette that the company will be struck off from the register and, if no objection is received, the company will be dissolved. This process is not a formal insolvency process and the conduct of the directors does not currently get investigated.
Clearly, the proposals are intended to catch rogue offenders. There are still going to be many cases where strike off is entirely appropriate. Those with nothing to hide, have nothing to fear.
The reality check
Back in March, the British Business Bank reported that lenders had helped to prevent some 44k fraudulent bounce back loans, worth up to £1.6bn. The reality is however, there is likely to be many who got through the net.
Does the government have enough investigators/prosecutors to pursue those who have deliberately sought to take liberties with taxpayers’ money? Will there be sufficient “public interest” to pursue high volumes of low value (in relative terms) cases. The talk is tough, whether the walk is as tough remains to be seen. We have our doubts!
This post was created on 12/08/2021.
This blog has been prepared by BRI (UK) Limited as background information for the general reader and is not a comprehensive statement of the law or of proposed new legislation – we recommend that professional advice be taken on any specific issues arising in practice. Please note that the names and characters used in the examples mentioned above are hypothetical. Please also be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed.