The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 received Royal Assent on 15 December 2021.
The Act implements changes to the Company Directors Disqualification Act 1986 (the CDDA). Importantly, it will allow the Insolvency Service to investigate the conduct of directors of dissolved companies.
What is the current position?
The CDDA allows the Insolvency Service to investigate the conduct of directors of insolvent companies. If that investigation determines that a director's conduct has fallen below the expected standards and public interest criteria are met, the director may be disqualified from acting as a director for a period of between two and 15 years, and may also be required to pay compensation if their actions have caused loss to the company's creditors.
However, the CDDA only allows the Insolvency Service to investigate the conduct of directors and former directors of companies that are still on the register and going through an insolvency process. Therefore, where directors make use of the voluntary striking off and dissolution process under the Companies Act 2006, no disqualification action may be taken unless the Insolvency Service first makes a court application to have the company restored to the register.
In the appropriate circumstances, voluntary strike off is a quick and cost-effective process for dissolving a business. However, the explanatory notes to the Act outline concerns that some directors make use of this process in order to enable a company to shed its liabilities before setting up a new company to carry on the same business (a process known as "phoenixism"), to avoid the costs of formal liquidation, or otherwise to avoid investigation under the CDDA.
What changes are being made?
The Act is intended to address these concerns by allowing the Insolvency Service to investigate the conduct of directors of a dissolved company without first having to make an application for restoration of the company. If it is considered that a director's conduct was unfit to be concerned in the management of a company, the director may be disqualified for the same period of between two and 15 years and may also be required to pay compensation if their actions have caused loss to creditors of the dissolved company.
Importantly, the Act will have retrospective effect and therefore allow the Insolvency Service to exercise its powers in relation to companies that were dissolved prior to the legislation coming into force.
What happens now?
The majority of the changes will come into force in two months' time on 15 February 2022, aside from powers for the Insolvency Service to require any person to provide information regarding the conduct of a director of a dissolved company, which came into effect on 15 December 2021.
The government hopes that the extended powers will discourage the use of the dissolution process as a method of fraudulently avoiding repayment of Bounce Back Loans and other financial support measures that were provided to businesses during the COVID-19 pandemic.
In practice, the extent to which the Insolvency Service will make use of these new powers remains to be seen. In administration and liquidation, an insolvency practitioner has a duty to report to the Insolvency Service on the conduct of the directors. However, where a company has been dissolved, it will be necessary for a creditor or other interested party to raise concerns about a director's conduct with the Insolvency Service, so time will tell how this affects the volume of cases reported for investigation.
In the meantime, directors should continue to be mindful of their duties, particularly in circumstances where a business is facing financial difficulty. Appropriate professional advice should be sought before making any decisions that may be detrimental to creditors' interests, and prior to taking any steps to strike off or dissolve a business.
If you would like more information on this subject or advice generally relating to a business facing financial difficulty, please contact a member of our restructuring and business advisory team or your usual Shepherd and Wedderburn contact.
Article written by Suzanne Knowles, Senior Associate in our restructuring and business advisory team.