The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill
In the biggest shake up for some time, powers are being given to the Insolvency Service to investigate the conduct of directors of dissolved companies (without the need for prior restoration to the Companies Register) with a view to recommending director’s disqualification in appropriate cases and thereby closing a loophole that has existed in the insolvency and directors disqualification legislation. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (the “Bill”) was introduced in the House of Commons on 12 May 2021. Once passed, it is likely to become law in late 2021 or early 2022 and apply in England & Wales, Scotland and Northern Ireland. A key feature is that it will have retrospective effect which means that directors will not be able to protect themselves from investigation by arguing they dissolved their companies before the Bill came into force.
The relatively straightforward and inexpensive dissolution process has historically been criticised because it is arguably open to abuse by directors attempting to ‘cover up’ certain behaviours, unfitness, misconduct as well as offload debts/shed liabilities before starting up a new and identical business (“phoenixism”). More recently, another concern is that dissolution will be used as a tool to avoid repayment of the Bounce Back Loans issued by the Government.
If the Bill is passed, its provisions will allow the Insolvency Service to investigate the conduct of directors and former directors of dissolved companies and, where appropriate bring disqualification proceedings against them under the Company Directors Disqualification Act 1986. Where the conduct is found to render that director unfit to be involved in the management of a company, possible penalties include disqualification from acting as a director for a period of between 2 and 15 years and the payment of compensation to creditors.
Given the already existing resourcing difficulties experienced by the Insolvency Service in dealing with the ‘normal’ disqualification cases, how will this added workload affect output? How will it be determined which dissolved company merits investigation? Will we see fewer dissolutions? Time will tell.
What is clear is that in these testing and uncertain times for many businesses, directors would be well advised to seek early advice on any decisions to cease trading.