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Insolvency Service gets powers to ban debt evading directors

Insolvency Service gets powers to ban debt evading directors

The Insolvency Service can now investigate and disqualify directors who dissolve their own companies in order to avoid paying liabilities, otherwise known as phoenixing.

The body's new powers, which were first announced back in 2018, were signed off by the UK’s business secretary, Kwasi Kwarteng, yesterday (December 16).

As part of this new legislative power, directors could now also have to pay compensation to creditors who have lost out due to their fraudulent behaviour, if Kwarteng decides to request this from court, according to the government announcement.

The government intends for these new powers instilled in the Insolvency Service to complement the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act, which was passed back in September to tackle directors who have dissolved their companies to avoid repaying government-backed loans, such as the Bounce Back Loan Scheme.

“These new powers will curb those rogue directors who seek to avoid paying back their debts, including government loans provided to support businesses and save jobs,” said Kwarteng.

“The government is committed to tackle those who seek to leave the British taxpayer out of pocket by abusing the Covid financial support that has been so vital to businesses.”

The Insolvency Service can now investigate directors of companies which enter any form of insolvency, including administration and liquidation. 

It may also be instructed to investigate live companies where there is evidence of wrongdoing, according to the government announcement.

If misconduct is found, directors can face sanctions, 15-year-long bans or, in the most serious of cases, prosecution.

The government is providing £1.5bn in business rates relief to sectors hit hardest by the pandemic, and which have not been eligible for existing support linked to business rates.

The government published guidance earlier this week to support local authorities in setting up local schemes through which businesses will be able to access relief.

Stephen Pegge, managing director of UK Finance, said: “The ability to dissolve a company when necessary is a right reserved in legitimate circumstances where there are no outstanding creditors, however, it can be open to abuse.

“The banking and finance industry therefore supports this legislation which will provide much needed powers to the Insolvency Service to help hold rogue directors to account by providing additional deterrents and easier enforcement of the rules.”

Back in September, the Financial Services Compensation Scheme told FTAdviser it had alerted the regulator to 412 phoenixing cases, where advisers who worked at firms that defaulted had joined a claims management company to bring claims against their previous firm. 

It said there were further cases it was currently working through.

The revelation followed the FCA’s proposals to ban CMCs from managing FSCS claims where they have a relevant connection to the claim

ruby.hinchliffe@ft.com