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Why is a crackdown on debt-evading directors good news for debt recovery?

Chasing long-term, overdue debt can be time-consuming and frustrating enough, but if the company you're chasing ceases to exist, things can get tricky. Now, at last, the Insolvency Service has been given new powers to investigate and disqualify directors who fraudulently dissolve their companies to avoid paying debts.

Running a business successfully means putting your trust in the integrity of those you deal with. However, at the back of your mind there will always be a nagging concern. Could a desperate or unscrupulous customer go rogue and use fraudulent means to get out of paying the money they owe you?

The good news is that, as a creditor, you now have one less loophole in the law to worry about. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act should finally close off an avenue that currently enables unethical company directors to abuse the company dissolution process to avoid paying liabilities to staff, creditors and HMRC.

Extending investigatory powers

Previously, the Insolvency Service only had authority to investigate directors of companies which have entered a form of insolvency, including administration and liquidation. The new Act extends those investigatory powers to directors of dissolved companies. If misconduct is found, the director could be disqualified for up to 15 years or, in the most serious cases, could face prosecution.

How the new Act helps creditors

The new Act isn't just about getting retrospective justice if you're the victim of company dissolution fraud. It should also act as a significant deterrent, reducing the risk of it happening in the first place. If a director faces potential disqualification or criminal prosecution, he or she should think twice about taking the dissolution route. Even if the company is forcibly wound up and you end up getting only a partial settlement of the debt from the receivers, it's better than nothing!

"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," commented Stephen Pegge, Managing Director of UK Finance. "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.”

Financial compensation

There’s another provision in the new Act which is good news for you if you're trying to recover debts from an illegally dissolved company. The Business Secretary can now apply to the court for an order to compel a former director to pay compensation to you as a creditor if you've lost money resulting from the director's fraudulent behaviour.

Dissolving a company

Even though some unscrupulous directors choose to dissolve companies to try and avoid debt, the debts don't disappear. The law says that the debts must be repaid before the process of dissolution is started. Alternatively, directors must choose another form of company closure, such as liquidation.

It's important to keep a close eye on things. Directors can't simply go ahead with dissolving their company and having it 'struck off' the Companies House register. They have a legal responsibility to inform all creditors and the intended striking off should also be advertised in The Gazette (which publishes the online profiles of every UK business registered with Companies House), so it becomes public knowledge. As a creditor, you can object to the striking off application and take enforcement action to recover any outstanding debts. You can also apply to have the company reinstated to the Companies House register so that you can take further action.

No time limit for action

Fortunately, time is on your side. If a company is dissolved illegally with outstanding debts, any creditor has the right to instigate legal action to reinstate the company for up to 20 years after the date of the dissolution.

Other consequences if the dissolution fails

Attempting and failing to dissolve a company to avoid debt can backfire on the company directors. In this situation, it's likely that the company will be forced into compulsory liquidation by the court. This could turn out to be more problematic for the directors than choosing voluntary liquidation, because the proceedings will be carried out by a court or creditor-appointed insolvency practitioner, rather than one chosen by the directors themselves.

Getting proactive support

Dealing with problem debtors means being proactive and managing the customer relationship with close contact and attention to detail. At Redwood Collections, we can help you chase outstanding debts more robustly and effectively, reducing the risk of default. Where legal action is required, we can guide you authoritatively on the best course of action and help you ensure that you've explored all possible options. With our support, your business can Grow Stronger.

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