New sanctions for directors who dissolve companies to avoid paying wages and pensions

Directors who allow companies to go insolvent to avoid paying workers and pensions will now face harsh sanctions, the Insolvency Service has announced.

Known as ‘phoenixing’, the regulator said directors who dissolve companies to avoid paying workers or pensions could be landed with fines or be disqualified as directors.

The sanctions, which are the first of their kind, are designed to safeguard workers, pensions and small suppliers when a company goes bust.

The measures follow new evidence that shows that some directors deliberately “dodge debts” by dissolving their companies and then starting up a near identical business with a new name.

The fines are being introduced as part of a new packet of measures designed to help companies in distress to repay their debts and restructure their business into a viable venture.

These measures include giving companies more time to restructure or seek new investment to restructure their business, while also enabling companies in financial distress to continue trading through the restructuring process – ensuring that small suppliers and workers continue to be paid.

The Insolvency Service said it will also work to improve awareness of directors’ legal duties when companies approach insolvency or are insolvent.

Commenting on the announcement, Business Minister Kelly Tolhurst said: “While the vast majority of UK companies are run responsibly, some recent large-scale business failures have shown that a minority of directors are recklessly profiting from dissolved companies. This can’t continue.

“That is why we are upgrading our corporate governance to give new powers to authorities to investigate and hold responsible directors who attempt to shy away from their responsibilities, help protect workers and small suppliers and ensure the UK remains a great place to work, invest and do business.”

Stuart Frith, president of insolvency and restructuring trade body R3, added: “R3 welcomes the government’s announcement that it is progressing its corporate insolvency proposals, which should help to ensure that the UK’s insolvency and restructuring framework retains its world-class status.

“Our members have long raised concerns that some directors are deliberately dissolving businesses to avoid paying their debts. A strengthened disqualification regime will be an important part of ensuring that directors are less likely to walk away from their responsibilities.”

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Maung Aye
Maung is a partner in our Corporate and Commercial department. He joined Mackrell Turner Garrett following corporate law positions in London and in a leading regional firm in Essex. Maung read European Legal Studies at Lancaster University and the Università degli Studi di Trento and is a fluent Italian speaker.