In the first three months of 2021, almost 40,000 companies were struck off the Companies House register – an increase of 743% on the same period in 2020. Speculation that these figures related to avoidance of coronavirus-related loan repayments led the Department for Business, Energy and Industrial Strategy to take the highly unusual step, in March 2021, of making a blanket objection to any application for dissolution by a company with an unpaid bounce-back loan. It is claimed that this has prevented the dissolution of almost 51,000 companies, with unpaid loans totalling over £1.7 billion.
The source of such concern is the process set out in the Companies Act 2006, which allows the directors of a company to apply for its voluntary strike off and dissolution. In theory, the procedure offers a relatively straightforward and cost-effective way to close down a non-trading company. However, fears of an epidemic of fraud in relation to the various coronavirus-related support schemes has focused the government’s attention on one failing of the voluntary strike-off process – a distinct lack of scrutiny. The potential for abuse by rogue directors is substantial. A loophole in the law means that directors of dissolved companies fall outside the remit of the Company Directors Disqualification Act 1986 (CDDA). As matters currently stand, use of the voluntary strike off process enables directors to avoid investigation by the Insolvency Service and the risk of disqualification - not to mention the risk of being made personally liable for the company’s debts. The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (the “Bill”) extends various provisions of the CDDA to directors of dissolved companies, enabling the Insolvency Service to investigate their conduct and apply for their disqualification.
While there is nothing controversial in the concept of extending the CDDA in this manner, there are fears that, by itself, the Bill will not go far enough to address the root of the problem. During the second reading of the Bill in the House of Lords, concerns were expressed that the real issue goes far deeper – indeed, right back to the company formation process. At present, directors are not required to be resident in the UK, may be corporate bodies rather than natural persons, and are subject to limited checks at the point of registration. The Government has consulted on transparency and reform of the company register, including implementing a ban on corporate directors, and legislative action on this is expected. In the longer term, it is likely that this will have more impact on the issue of fraud than the Bill, which in some quarters is seen as more a case of closing the stable door after the horse has already bolted.
Quite apart from the difficulties of enforcement (particularly against directors outside the jurisdiction), serious questions have been raised regarding the capacity of the Insolvency Service to deal with an increase in investigations. The Chief Investigator of the Insolvency Service has issued a statement urging “…anyone who suspects a company has been involved in this kind of abuse, or has information about directors fraudulently obtaining Covid business support, to alert us immediately”. However, there is currently no indication of any additional funding being made available to enable the Insolvency Service to deal with such complaints. In practice therefore, resources will be focused on dealing with the most serious cases, where investigation is deemed to be in the public interest (most likely cases involving loss to HMRC, or fraud related to covid support schemes). While some form of “cherry picking” is undoubtedly necessary to avoid the dissipation of resources, it does mean that many offenders are likely to continue to fly under the radar.
Despite being encouraged to act (quite legitimately) as whistle-blowers, in most cases creditors are likely to receive little direct benefit from the Bill. Although the Bill does allow for compensation orders or undertakings to be sought in favour of a creditor or creditors, its primary aim is to deter misconduct and sanction offenders, rather than to return funds to creditors. In any case, having to rely on the Secretary of State, through the Insolvency Service, to make an application for compensation is an indirect and unsatisfactory solution for an out-of-pocket creditor. For creditors who are owed substantial sums by a dissolved company (assuming they were not made aware of the proposed dissolution in time to object), the only real option remains the cumbersome and reasonably costly process of restoring the company to the register in order to take proceedings against it, or wind it up.
For the moment therefore, whilst the Bill is to be welcomed as an extra string to the Insolvency Service’s bow – and may help to hold at least some of the worst offenders to task – it may bring cold comfort to creditors who find themselves in the unfortunate position of still needing to pursue a dissolved company for redress.
This article was first published in Fraud Intelligence, see here.