Laws and Rules of Accounting

Dissolution loophole legislation passes first reading

The Government is working on new legislation to try and stop company Directors using dissolution through strike off as a means of avoiding repayment of liabilities – notably government-backed funding, such as CBILS or Bounce Back Loans. The new law which has had its first reading in Parliament, looks set to become law later this year.

Dissolution through strike off

Dissolution through strike off is primarily designed as a means for closing down a company that is no longer trading and has no active liabilities. However, in some cases it has been used by company directors as an alternative means of liquidating businesses without coming under the investigation of the Insolvency Service. If the company is actually insolvent or facing insolvency and has existing liabilities, Directors should use formal liquidation, administration or a CVA (Company Voluntary Arrangement) as the correct means to seek a solution and/or correctly wind down the company. These routes not only show intent by the Directors to do things properly and fulfil their obligations, but it also ensures creditors are treated fairly and any options for turnaround, restructuring or recovery have been properly investigated.

Given the scale of Government support provided to companies during the pandemic, there is now a fear that some directors will look to avoid repayment of government-backed funding, such as CBILS or Bounce Back Loans, by dissolving their company instead of placing it into a formal insolvency process such as liquidation.

New powers for the Insolvency Service

The law change, if passed, will give the Insolvency Service the power to retrospectively investigate companies (and their Directors) that have used the dissolution through strike off method to dissolve the company but with government backed loan repayments still outstanding. The legislation will also prevent Directors from using this option to close down a company if it is proved to still have active liabilities.

Currently, only live companies, or those that enter a formal insolvency process, can be investigated by the Insolvency Service for allegations of fraudulent trading. Directors can face a number of penalties and sanctions if found guilty of misconduct, including being made liable for company debts or being disqualified from acting as the director of a limited company for up to 15 years.