Ministers will crack down on company directors seeking to dissolve their businesses to avoid repaying creditors in a bid to prevent the loophole being exploited to write off state-backed emergency Covid-19 loans.
The Insolvency Service will be given beefed up powers to investigate and sanction directors found to have abused the process. The measures, which are part of bill put before parliament on Wednesday, will also give the government agency retrospective powers.
The government promised to clamp down on any potential fraud in repaying Covid loans in the Budget earlier this year. Officials are keen to close the loophole to curb any losses to the taxpayer as banks start to charge interest or seek to recoup the loans once the repayment holidays on the government-backed schemes end.
Directors found guilty of misusing the insolvency process would face sanctions such as a ban from serving as a company director for up to 15 years. The new measures would also prevent directors of dissolved companies from setting up a near identical business.
The government said the process, which often leaves customers and creditors, including the HM Revenue & Customs out of pocket, would “no longer be able to be used as a method of fraudulently avoiding repayment of government backed loans given to businesses to support them during the coronavirus pandemic”.
The government has provided partial or full guarantees on about £75bn of Covid emergency loans, which were designed to keep business afloat during the various lockdowns. The majority of loans were made to about 1.5m small companies through the “bounce back” loan scheme that offered up to £50,000 interest free for a year.
Banks have started to write to thousands of borrowers to warn them of the need to start covering outstanding debts, which executives have said would flush out attempts at fraud.
Business secretary Kwasi Kwarteng said the government would “not hesitate to disqualify directors who deliberately leave employees and the British taxpayer out of pocket”.
He added: “Extending powers to investigate directors of dissolved companies means those who have previously been able to avoid their responsibilities will be held to account.”
Roger Barker, director of policy and corporate governance at the Institute of Directors, said: “Using company dissolution as a mechanism for the evasion of a directors’ duties has no place in the governance of a responsible enterprise.”
The new bill also legislates to prevent companies from claiming business rates relief on the grounds the pandemic represented a “material change of circumstance”.
The government has estimated that 170,000 companies have made such claims — but on Wednesday said such marketwide economic changes to property values can only be properly considered at general rates revaluations.
“Allowing business rates appeals on the basis of a ‘material change in circumstances’ could have led to significant amounts of taxpayer support going to businesses who have been able to operate normally throughout the pandemic and disproportionately benefiting particular regions like London,” the government said.