A loophole that allows directors to avoid investigations into their conduct following an insolvency is set to close after new legislation had its first reading in parliament.

Director investigations are always carried out by the Insolvency Service after a company enters compulsory liquidation. Directors can also be investigated if their conduct is called into question during other types of formal insolvency.

These investigations can have serious consequences. In some cases, directors can be made personally liable for any company debts and they can be banned from running a limited company for up to 15 years.

Company directors can currently avoid this scrutiny if they informally strike off their company rather than entering a formal insolvency procedure. New legislation aims to close this legal loophole by preventing the dissolution of companies with active liabilities.

The law would also apply retrospectively, meaning that the Insolvency Service would be able to go back and investigate companies that have already dissolved with outstanding liabilities.

No way to dodge coronavirus loans

It is thought that the new legislation is being driven by a fear that some directors will look to avoid repaying government-backed coronavirus loans by dissolving their company instead of pursuing formal insolvency procedures like liquidation.

The striking-off process is designed for dormant companies that are not threatened by insolvency. Dissolving a company in this way is not currently classed as a formal insolvency procedure, so directors are not subject to investigation.

The right way to close your company

If your business has outstanding liabilities, the correct way to close it down is through a formal liquidation process. Pursuing a liquidation means that all outstanding creditors are treated fairly and indicates that directors are keen to carry out their legal obligations.

Seeking to avoid scrutiny by incorrectly dissolving your company may prompt the Insolvency Service to look more closely into your conduct as director.

If your company has a strong foundation, but is plagued by short-term challenges, then you may be able to pursue alternative processes to ensure long-term business success. This could include pursuing a Company Voluntary Arrangement (CVA), in which you negotiate repayment terms with creditors, or an Administration, which can allow you to restructure your business.

For more information about company insolvencies, speak to a member of the team today. Call: 0800 611 8888.