The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act, introduced in December last year, bestows powers on the Insolvency Service to investigate and disqualify former company directors who dissolved a company with debts, without having to restore the company first. 

The recent rule change paints a target on the back of former company directors who take advantage of the company strike-off process, reserved for companies with no liabilities. Former directors of dissolved companies who are guilty of misconduct can be disqualified for up to 15 years, prosecuted and ordered to pay compensation to creditors.

The Act arrives at an opportune time because there’s much at stake for the British taxpayer. The government provided loan guarantees through government-backed COVID-19 schemes during the pandemic, such as the Bounce Back Loan Scheme, but they must now enforce a deterrent to directors looking to sidestep those loan repayments.

In practice, what does this mean for accountants when advising clients searching for a way to close a company? What telltale signs must they take note of – and does the deterrent go far enough?

The rise of phoenix companies

The Act aims to deter company directors from opening a ‘phoenix’ company – closing a company with debts and starting a new one to resume the same business, but with the benefit of a fresh financial slate. The business is reborn like a phoenix rising from the ashes, but in a different form.

There is undoubtedly a significant number of directors who have taken out Bounce Back Loans (BBLs) without intending to pay them back, having misused the funds by spending on non-business-related expenses or utilising them for their personal benefit. And the number of directors attempting to strike off companies with outstanding liabilities, usually a BBL, is also increasing. In most cases, the proposed strike-off, whether voluntary or compulsory, is subsequently objected to and suspended, presumably by a creditor and most likely the funder who has provided a BBL, where there is one outstanding. 

Where objection and suspension do take place, it prompts those directors to take the correct steps to wind their company up via a voluntary liquidation process, such as a creditors’ voluntary liquidation (CVL). 

However, there are rare instances when these strike-offs do slip through the net, which is when the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act comes into play as it provides powers to the Insolvency Service to pursue/investigate such directors, as a liquidator would in liquidation.

Telltale signs of director misconduct and raising the alarm 

When a client attempts to strike off their company with outstanding liabilities, the directors should be warned against doing so and directed to a formal insolvency procedure. At this point, accountants must perform routine due diligence, such as money laundering checks, and determine whether COVID-19 government-backed funding was misused by asking questions such as:

• Was the company entitled to receive the funding?
• Was the funding obtained at the correct level?
• Have the funds been used appropriately?

Although accountants have little control over these matters, they can advise clients on how to responsibly close a company. If they suspect BBL misuse, the insolvency practitioner will launch an investigation as part of the insolvency process. 

When considering what action accountants must take if they suspect BBL fraud and who they should report to, follow the ICAEW code of ethics and uphold professional standards. If there are money laundering concerns, raise the alarm to the designated money laundering reporting officer. 

Food for thought 

Accountants are often the first port of call for advice on closing a company. Therefore they are well placed to guide clients in financial distress on seeking professional advice from a qualified insolvency practitioner, rather than attempting to strike their company off with outstanding liabilities. As the insolvency process remains in the hands of a responsible insolvency practitioner, they will seek to achieve the best outcome for creditors. 

Keith Tully is a Partner of Real Business Rescue, part of corporate recovery specialists Begbies Traynor.