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Richard Ludlow

Partner - Sevenoaks & Ashford

Director Disqualification – Dissolved Companies

Director Disqualification – Dissolved Companies
The Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Bill

The recent update has confirmed that the above bill is in the process of making its way through the final stages in Parliament and is expected to be given Royal Assent – which means it becomes law – very soon. The bottom line is if it does become law then directors of companies that were dissolved, rather than being liquidated, could be investigated and potentially become subject to director disqualification proceedings. This is a fundamental change to the director disqualification process which has been in place since the Company Director Disqualification Act 1986 (“CDDA”) came into being.

A brief explanation – Dissolution

The reason for the attraction, for a company director, to consider dissolution is that it allows for a far easier and less costly way of bringing the company to an end – and, ultimately, removing the entity from Companies House. To process it is as easy as the directors signing a form – which is then filed with the Registrar of Companies. The directors then have to put a notice confirming the proposal to strike-off the company in the London Gazette – following that, 2 months later (unless there are objections), a final notice is filed and the company is dissolved.

Why do we need the new Bill?

The reason, in part, for the introduction of the new provisions is due to the abuse or perceived abuse, by directors, and the fact that it has been made known that the Insolvency Service has been receiving regular complaints, from members of the public, concerning directors who it has been said have abused the process to benefit themselves. These abuses have come in various different forms, according to the Insolvency Service.

The most recent and well publicised concern has come as a result of the introduction, by the government, of bounce back loans due to the Covid pandemic. There have been reports that company directors have been claiming these sums from the government and then – in order to avoid having to repay the loans – dissolving the company.

A further concern – that predates the Covid pandemic – is where directors close down one company and then set up another company to take its place doing effectively the same thing but without the liabilities. The practice – known as “Phoenixism” – was and perhaps still is common where the company and its directors are facing issues with the company. The action is viewed as a way of escaping liabilities, avoiding the costs and other potentially personal consequences of liquidation and the appointment of a liquidator.

Perhaps the crucial reason for company directors to choose to dissolve the company, rather than to put it through an insolvency procedure, was due to the inability to investigate conduct in the scenario where the company was dissolved – allowing the directors to avoid the potential for disqualification under the CDDA.

What will the Bill allow?

As we have seen above, as things stand, directors who dissolve a company won’t face investigation into their conduct, by the Insolvency Service, under the CDDA. This means, it is believed, that large numbers of directors are getting away with the decisions they make. The government, to try and stop this from happening, has introduced the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill.

As we have said, the purpose of the proposed bill is to enlarge the powers, available to the Insolvency Service, to investigate and disqualify directors under CDDA. The extension of the powers will allow them to review the actions of directors of dissolved companies under the CDDA. The bill will also allow the Insolvency Service – as they can with investigations currently carried out into insolvent companies – to ask the court for an order for compensation – if the actions of the director, who is to be disqualified, can be demonstrated to have caused a loss to creditors.

Conclusion

The new bill if passed, as is expected given that it has encountered no resistance from MPs, will provide the Insolvency Service with equivalent powers of investigation against directors of companies that were liquidated and dissolved. This means that the directors of companies who are currently in a financially difficult position will have to take care to give thought to all of the actions that are being taken because soon, choosing to dissolve your company, will not mean that you avoid investigation if the actions taken warrant it.

It is now, more than ever before, essential for directors to pro-actively take early legal advice as to the options they have in respect of the company because to simply dissolve it will no longer be the easy, risk free decision that perhaps it used to be.

Contact our insolvency lawyers in Sevenoaks, Ashford, Brighton & Hove, and Uckfield

If you are a director of a company and are facing issues with debts, or if you have questions regarding dissolving a company, then please get in touch and we can discuss the various options you have available. Contact partners Richard LudlowDan Sherlock or Alistair Rustemeyer in our Restructuring & Insolvency team or call 01732 441695 for an initial conversation on your individual options.

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