Too many ‘blinkered’ directors in the UK still think they can shake off debt – including Covid-19 bounceback loans – by dissolving their own companies.
Restructuring and insolvency professionals at UK accountancy firm Azets are seeing and hearing of cases where directors go ‘DIY’ to illegally close their businesses in the mistaken belief they can flee creditor obligations.
Azets restructuring and insolvency partner, Chris Tate, said: “Increasingly, we hear of directors who mistakenly believe they are exempt from all responsibility by filing for strike-off from the Companies Register.
“But the simple fact is that you should not be doing this if you have creditors, including banks which lent bounceback loans in a scheme backed by taxpayers during the pandemic, and your business is threatened with liquidation.”
He added: “The problem is that the scale of the problem is obscured by the tens of thousands of strike-offs initiated each year either by Companies House for non-filing of accounts and confirmation statements, or by application by the company.
“Abuse of the strike-off process so as to avoid any investigation of the directors’ actions which would ordinarily take place if liquidated, including potentially fraudulent misuse of Covid financial support schemes, is being detected but perhaps not as much as it should be.”
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Punishment includes fines and prosecution.
Tate cited the case of a Southampton plumber who was jailed for eight months this August after his company’s affairs were investigated by the Insolvency Service.
Two days after the plumber withdrew £19,600 from a £20,000 bounceback loan in May 2020, having “overstated his turnover,” he applied to close his company down by having it struck off; the business was already in financial difficulty beforehand.
In a press release on the case, the Insolvency Service stated: “The striking-off application to dissolve a company makes clear that creditors, such as a bank with an outstanding loan, should be notified within seven days of applying to close the business, and that failure to notify interested parties is a criminal offence.”
R3, the insolvency and restructuring trade body, campaigns at policy level to close loopholes.
One of the recommendations is that, instead of automatic strike-off, companies failing to file accounts should enter compulsory liquidation overseen by the Official Receiver, which would enable earlier director investigation and asset recovery.
Tate concluded: “Government has a lot in its in-tray, so consideration of strike-offs reform is likely to be at the bottom end of the sky-high pile, but it is essential that directors know they cannot shake off legal obligations to creditors.
“It is important that there are robust mechanisms in place designed to capture misuse of the strike-off process – and a clear message to directors that offenders will be brought to justice.”