Crackdown on rogue directors: new powers for UK Insolvency Service

May 2022  |  FEATURE | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

May 2022 Issue

“We want the UK to be the best place in the world to do business and have provided unprecedented support to businesses to help them through the pandemic,” announced Kwasi Kwarteng, UK business secretary, when presenting measures to tackle the coronavirus (COVID-19) crisis.

However, the sad reality is that much of the UK government’s support – largely in the form of billions of pounds of bounce back loans – found its way into the coffers of companies (often bogus) whose directors had less than noble intent, leading to funds being squirreled away and the dissolution of said companies shortly thereafter.

And these sums are significant. According to the National Audit Office (NAO), an estimated 11 percent – a total of £4.9bn out of £47bn issued – of the 1.5 million loans granted under the government’s ‘Bounce Back Loan Scheme’ (BBLS) were fraudulent.

“It is unsurprising that the BBLS has been exploited by fraudulent claimants – it was set up at speed, with minimal fraud-prevention measures in place,” says Lindsey Cullen, an associate at WilmerHale. “The failures of the BBLS illustrate how fraudsters, whether acting through organised crime or opportunistically, can quickly exploit systematic weaknesses in financial schemes.

“It also serves as a reminder of the difficulties of recovering money after it has fallen into fraudsters’ hands,” she continues. “The government has predicted that it may recover only £6m of cash lost to organised crime. Although the NAO has said that £4.9bn may be an overestimate, the potentially vast scale of this fraud is nonetheless embarrassing for the UK government.”

In a bid to boost recovery measures, in February 2022 the UK Insolvency Service was granted new powers to investigate, disqualify or prosecute directors of dissolved UK companies via the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act. The new legislation amends the Company Directors Disqualification Act 1986.

Previously, the Insolvency Service only had powers to investigate directors of live companies or those entering a form of insolvency, meaning it was not possible to investigate the conduct of former directors of dissolved companies without first applying to the courts to restore the company to the register of companies, which can be a lengthy and costly process.

“The new measures would allow investigations into the conduct of former directors of dissolved companies without it being necessary to first restore the company to the register,” affirms Jessie Bridgett, managing associate at Mishcon de Reya LLP. “It is also no longer necessary for the dissolved company to have been subject to insolvency proceedings in order for the power to investigate to apply.”

Key takeaways

As well as being retrospective in effect (an application for a disqualification order can be made up to three years after a company has been dissolved), the new legislation extends the Insolvency Service’s powers, including significant sanctions, to tackle directors dissolving companies to avoid repaying government-backed loans put in place to support businesses during the pandemic.

“The Act seeks to prevent the avoidance of creditor payments by directors who dissolve companies without a formal insolvency process,” observes Mick Moser, head of UK restructuring & insolvency at TaylorWessing. “The secretary of state can now apply directly to the court for disqualification orders and subsequently obtain creditor compensation orders. This power extends to dissolved solvent companies.”

Furthermore, the business secretary will be able to apply to the court for an order to require a former director of a dissolved company, who has been disqualified, to pay compensation to creditors who have lost out due to their fraudulent behaviour. The Insolvency Service may also be instructed to investigate live companies where there is evidence of wrongdoing.

The Act will also help to prevent directors of dissolved companies from setting up a near identical business after the dissolution, often leaving customers and other creditors, such as suppliers or HMRC, unpaid.

“Under the new legislation, directors who are found to have improperly abused the dissolution process could also face disqualification of up to 15 years,” adds Ms Bridgett.

Restoring confidence

As the UK builds back better from the impact of the pandemic, the Insolvency Service’s enhanced ability to target and penalise rogue directors has the potential to go some way toward restoring not only business confidence, but also people’s confidence in business.

Alongside the upgrade in the Insolvency Service powers, the government has also invested over £100m in a Taxpayer Protection Taskforce, consisting of more than 1000 HMRC staff specifically tasked with tackling fraud within COVID-19 support packages.

“These new powers will curb those rogue directors who seek to avoid paying back their debts,” declared Mr Kwarteng. “The UK government is committed to tackle those who seek to leave the British taxpayer out of pocket by abusing the financial support that has been so vital to businesses.”

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Fraser Tennant