On 12 May 2021, the UK Government introduced the snappily titled “Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill”.
As the title of the bill suggests, it seeks to amend the applicability of the directors’ disqualification regime to directors of dissolved companies. A summary of the current regime is summarised in this note on directors’ duties in the context of companies that are (or may become) insolvent.
Currently, in order for the Insolvency Service to take disqualification action against directors of disqualified companies, they first need to make an application to Court to have the company restored. This time-consuming exercise delays the investigatory action, and is costly, with the costs falling on the public purse. The bill is designed to remove that hurdle, and therefore the time and cost associated with it.
Under the proposed legislation, if the Insolvency Service are satisfied that the conduct of a director of a dissolved company demonstrates that the director is unfit to be concerned in the management of a company, it can seek a disqualification order against that director, without first needing to restore the company.
A key point to note is that the bill is intended to have retrospective effect i.e. the Insolvency Service could exercise the powers in relation to companies that were dissolved prior to the legislation coming into force. From the explanatory notes that accompany the bill, part of the rationale appears to be that the UK Government wants to target individuals who have inappropriately wound up companies after receiving Bounce Back Loans (presumably having used those loans for the directors’ personal benefit) designed to enable smaller companies to survive the COVID-19 pandemic.
The UK Government also appears concerned that directors of insolvent entities are using the dissolution process as a way of avoiding the cost, but more importantly the scrutiny, that comes with a formal insolvency process. The UK Government also states that the legislation seeks to tackle phoenixism, whereby directors cause or allow a company to be dissolved with a view to shedding liabilities, only to then incorporate a new company continuing the old company’s business, free of those liabilities.
Directors who use, or have used, the dissolution process for those purposes can therefore expect to find themselves in the cross hairs of the Insolvency Service once the legislation becomes law.
As ever, directors should always be conscious of their duties, particularly in circumstances where the company is or may become insolvent, and take appropriate advice prior to instigating any wind-down or dissolution process.