New Law Passed to Crack Down on Directors Dissolving Companies with Unpaid Loans

11 JAN 2022

A new law has been introduced by the government in an attempt to crack down on fraudulent behaviour relating to covid-19 loans. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act (“Act”) 2021, essentially aims to stop directors dissolving companies as a way of avoiding paying back loans. Dissolving a company simply means shutting it down: once a company has been dissolved, it ceases to legally exist.

The Act is seen by many as a response to the widely reported concern that circa £5 billion of the £47 billion lent out by the Government during the pandemic has already been lost to fraud. The vast majority of this money was for the Bounce Back Loan scheme, whereby 29 approved lenders – including major retail banks – offered to lend up to £50,000 through a government-guaranteed system. This has meant that Government is the only party to have lost out, as all the lenders had their loans guaranteed by the government, regardless of whether the borrowers could, or did, repay.

This law addresses an established loophole, whereby directors of companies with significant debts were dissolving their companies with the intention of avoiding repaying their creditors. Prior to the Act, once a company has been dissolved and a certain amount of time has passed, a creditor (i.e. the lender) has very little legal recourse to claim back their money from the directors of the company.

Prior to the Act, creditors who wished to object to the dissolution of a company did have a notice period in which to do so. However, there is no formalised procedure which ensures that all interested parties – such as creditors –  learn of any dissolution proceedings, meaning that often they find out too late to object. This means they would have no recourse through which to claim their money back, something that many considered unfair. The Act aims to change that.

Whilst one of the only options a creditor had previous to this Act was to bring court proceedings to restore the potentially fraudulent company to the register at Companies House, this was seen as disproportionately expensive and time-consuming for small amounts of debt. Equally, creditors could make a report to the Serious Fraud Office (SFO) if they have enough evidence. Again, however, this was practically difficult as the SFO would only occasionally deal with relatively small claims.

Practically, the new system put in place by the Act will work through the extended powers given to the Insolvency Service, a subsidiary of the Government’s Department for Business, Energy and Industrial Strategy. Thanks to the Act, the Insolvency Service now has the power to investigate former directors of dissolved companies. Prior to the act, the service could only investigate companies entering insolvency, and so this will evidently make it more difficult to escape scrutiny. Also important from a practical point of view, is that the Act will apply retrospectively. This means that any director who may have acted with fraudulent intentions could be investigated, even if the behaviour pre-dates the Act.

Besides from being forced to pay compensation to creditors, the costs of being found guilty of fraudulent behaviour will mean that former directors of such companies will be disqualified from acting as a company director in the UK for up to 15 years. This sanction will be administered by the Insolvency Service itself and was another of the new powers granted to it. In the most serious cases they may face prosecution for committing fraud, but this would not be dealt with the Insolvency Service.

Whilst the focus for the Insolvency Service at the moment will be on Bounce Back Loans, and ensuring the Government recovers fraudulent loans, going forward this could have much wider ramifications as it could open up a new avenue for smaller and medium-sized creditors to reclaim their loans through if companies who owe them money are dissolved.

Watch this space.

Yulia Barnes

Managing Partner
BarnesLawAssociates

Yulia Barnes is our Managing Partner. She is an experienced solicitor and advises on a wide range of contentious and non-contentious matters for both private and corporate clients.

yulia@barnes-law.co.uk

Experience Yulia started her legal career at a large international Magic Circle firm. She then became a partner at a regional law firm and headed a Dispute Resolution Department. She then moved in-house before starting her own Boutique practice, Barnes Law, with the aim of providing exclusive services to high net-worth individuals and privately-owned businesses. More details can be found on her LinkedIn profile.

Expertise Yulia and her team are widely recognised for their professional and practical approach to matters. She is committed to ensuring that her clients’ objectives are achieved in the most cost-effective way possible.

Approach Yulia has a wealth of experience working with businesses of all sizes: from large multinational corporations to start-ups. She has particular expertise in a hospitality industry, investment funds, private and corporate clients, and focuses on startups and technology-driven companies. Yulia brings the same level of attention to detail, professionalism and a personal touch to every case and client, and truly immerses herself in her clients’ businesses. She prides herself on her problem-solving, commercially astute approach and her track record of partnering with clients to help them achieve their strategic objectives.

Will Moran

Solicitor
BarnesLawAssociates

Will joined Barnes Law as an Associate Solicitor in Spring 2023, shortly after qualifying in September 2022.

Will works mostly on real estate and corporate/commercial matters. Will enjoys providing advice on transactional matters.

Away from the office, Will can be found reading or playing golf. While he played rugby until university, and rowed throughout his degree, he now tends to watch both from the sidelines. During the winter he can also be found skiing.

Will plans to continue developing his legal skills and experience at Barnes Law, under the expertise and guidance provided by Yulia.

will@barnes-law.co.uk



Mark Corran

Solicitor
BarnesLawAssociates

Mark is an experienced solicitor whose practice areas include intellectual property (IP), IT, data protection and general commercial law.

Mark advises businesses of all sizes – from sole traders to corporations. Among his clients are: clothing and lifestyle brands, restaurants and food suppliers, IT companies, banks, hedge funds and venture capital firms, education providers, medical and pharmaceutical brands.

Outside of his practice, Mark also advises members of the Institute of Directors as part of its Directors’ Advisory Service.

mark@barnes-law.co.uk

Recent transactions
  • Prosecuting a UK trademark application on behalf of an education provider and representing them in related UK IPO opposition and revocation proceedings;
  • Advising a publisher and a delivery business on data protection matters, B2B and B2C Ts & Cs of sale, website and app Ts & Cs, all aspects of global brand protection;
  • Advising footwear brands, alternative asset managers and hedge funds on their global brand protection, including overcoming various refusals, representing them in opposition proceedings and settlement negotiations;
  • Representing a central bank in opposition proceedings before the UK IPO;
  • Advising a lifestyle brand concerning trademark clearance and protection, negotiations for a website/app development and maintenance agreement.


Ioulia Tatawat

Family Law Adviser
BarnesLawAssociates

Ioulia has a solid background in family law and offers guidance, clarity, and support to clients during one of their most challenging times in their life.

She advises on all three pillars of separation: divorce, children matters and financial settlements. Ioulia is a member of Resolution and is keen to try to settle matters at early stages.

Ioulia is dedicated to assisting clients and navigating them through their legal matters with clarity and support.

ioulia@barnes-law.co.uk

Alex Reidy

Paralegal
BarnesLawAssociates

Alex joined Barnes Law in September 2023 after finishing his master’s degree in law. Prior to joining Barnes Law, Alex worked in property litigation at Ashfords. Alex assists Yulia on a variety of both contentious and non-contentious matters.

Outside of the office, Alex enjoys reading and hiking. Prior to working in law, Alex was a competitive tennis player.

Alex continues to develop his skills in legal practice under Yulia’s guidance, he plans to sit the Solicitor’s Qualifying Exams (SQE) in 2024.

paralegal@barnes-law.co.uk

 

Mehves Selamoglu

Paralegal
BarnesLawAssociates

Mehves joined Barnes Law in August 2023, right after graduating from Queen Mary, University of London (LLB Senior Status). As part of her qualification journey, Mehves is currently pursuing her Legal Practice Course (‘LPC’) at the University of Law. She also holds a degree in European Union Law from Maastricht University, Netherlands.

Mehves works closely with Yulia on a variety of contentions matters and also writes Barnes Law’s legal blogs, manages social media accounts and is responsible for marketing.

Outside of work and studies, she enjoys running, tennis and yoga.

Mehves is looking forward to developing her legal skills at Barnes Law.

mehves@barnes-law.co.uk

 

Julia Podgornova

Investor Relationship Manager
BarnesLawAssociates

Julia guides clients in making important business decisions based on comprehensive risk assessment and strategy. She supports investors in devising strategies designed to maximise each business’s potential from pre-seed to IPO.

Julia’s particular area of expertise are IT start-ups at different stages. Julia supports business through their fund-raising journey. As an Investor Relations Manager, Julia communicates with investors to facilitate a smooth round and legal part of each transaction.

In her free time Julia enjoys sailing, ballroom dancing, art exhibitions and travel. 

iuliia@barnes-law.co.uk