Directors of dissolved companies are being warned they could be disqualified or ordered to pay large amounts of compensation if they fraudulently spent financial support they received during the pandemic. 

New legislation will come into force next month (February) that can also be applied retrospectively. It gives the Insolvency Service the power to look into the activity of all companies that received financial assistance during the pandemic and were then dissolved. 

Directors of these companies will face investigation and action could be taken to disqualify them from being a director of any limited company in the future. Courts will also have the power to order directors to pay compensation to the unpaid creditors of the company. 

The national law firm, Stephensons, is now urging directors to think carefully and ensure that they take proper legal advice before taking steps to close a company. 

There have been a number of high profile cases where directors have claimed bounce back loans and then wrongly transferred the money out of the company before dissolving it. Other cases saw bounce back loans claimed fraudulently based on false or misleading information. 

As the extent of the abuse financial support became clear, the Government introduced additional measures to give the Insolvency Service even more power to investigate and take action. 

The Insolvency Service has already begun investigating these cases and bringing Director’s Disqualification proceedings when necessary. 

Julie Hunter, Senior Associate in the Commercial Litigation team at Stephensons Solicitors LLP, said: “Financial support handed out  during the pandemic has been a lifeline for many during an incredibly difficult time for businesses. However, this does not mean that some people did not look to take advantage of this support for their own gain. 

“Alongside this, I’m sure there will be some who have innocently dissolved a company after receiving support who may now see themselves facing questions from the Insolvency Service. I’d urge any former or current director considering dissolution or liquidation to do so carefully and to make sure they take legal advice on their personal legal position, as well as that of the company, before taking any steps to close the business.”

Dissolution is a means of bringing a company to an end without first going through a formal solvent or insolvent liquidation process. 

In effect it will mean that the normal investigations, which take place on liquidation, regarding the distribution of profits, assets and payments to directors from company funds will not take place. Instead the company is dissolved without further enquiry into its financial circumstances.