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The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (the Bill) was introduced in the House of Commons on 12 May 2021. Once enacted it will apply in England & Wales, Scotland and Northern Ireland.
The Bill makes amendments to both non-domestic rating legislation and director disqualification legislation. For the purposes of this article we will solely be focusing on the latter.
Section 1003 of the Companies Act 2006 (CA 2006) permits directors of a company to make an application to Companies House for the voluntary strike off and subsequent dissolution of a company. This process is relatively quick and cheap. In the appropriate circumstances, it is often the best option for directors seeking to properly wind down the affairs of a company.
Section 1029 of the CA 2006 permits a company to be restored to the register following dissolution. An application must ordinarily be made to the Court, costing time and money. In addition, the restoration application must be made within 6 years from the date of dissolution.
One of the longstanding criticisms of the dissolution process is that the Insolvency Service has no automatic powers to investigate the conduct of directors or former directors of a dissolved company, nor can director disqualification proceedings be issued under the Company Directors Disqualification Act 1986 or the Company Directors Disqualification (NI) Order 2002.
Investigations and director disqualification proceedings are therefore currently limited to live companies and those that are insolvent.
A common complaint from creditors in each jurisdiction is that companies have (in the eyes of the disgruntled creditor) been dissolved to offload debts, with the directors then setting up a new and identical business: a process known as “phoenixism”.
The Explanatory Notes to the Bill reveal that “evidence points to a low level but recurring theme of the dissolution process being used to shed liabilities, allowing a new company to take over the business without the burden of its previous debt. The debts avoided in this way often include tax and civil penalties, liabilities to consumers, or employment tribunal awards”. The dissolution process can also be used by directors as a way of avoiding investigation into their conduct as directors.
A director seeking to dissolve a company for any of the reasons outlined above is not acting illegally, but rather exploiting an obvious loophole that exists in the insolvency and director disqualification legislation. Nevertheless, it certainly does not sit well with the Government’s aim of ensuring public confidence in the regulation of director conduct and ensuring that unfit directors are restricted in their future business endeavours if warranted.
In a massive shakeup of the investigative powers available to the Insolvency Service, the Bill will allow the Insolvency Service in England & Wales and Northern Ireland to investigate the conduct of directors and former directors of dissolved companies without the Company having to first be restored to the Companies Register.
These enhanced investigative powers have been in the pipeline since 2018 but like much of the Covid inspired legislation that has been introduced over the past 14 months, the Bill has been prioritised due to concerns that the dissolution process may be abused by directors of failing companies moving forward. In particular, there is concern that it will be used as a tool to avoid the repayment of Government Backed loans i.e. Bounce Back loans.
Once it comes into force the Bill will have retrospective effect. It will apply to both directors and former directors of a dissolved company and the same potential disqualification periods of 2-15 years will attach if a director’s conduct is found to have been unfit. Importantly, compensation can be sought from both directors and former directors if their actions have led to losses to creditors.
Given the uncertain economic climate that many directors are operating in at the minute, directors and their advisors should now be considering the potential implications of this legislation in their decision making processes should they wish to cease trading. In short, neither directors nor former directors will be immune from potential investigation solely because they chose to dissolve their company prior to the bill being enacted.
We will eagerly wait to see how keen the Insolvency Service are to utilise these new powers moving forward. Will the very fact that a director has dissolved a company rather than putting it into a formal insolvency process to avoid repayment of Covid loans for example be a ground for director disqualification proceedings in itself? That we don’t know, but in the meantime directors should be asking themselves whether it is worth taking their chances.
This publication is intended for general guidance and represents our understanding of the relevant law and practice as at July 2021. Specific advice should be sought for specific cases. For more information see our terms & conditions
08 July 2021