Katharine Lawrenson at Leonard Curtis Legal talks about how extending the Director Disqualification Regime to dissolved companies will impact on creditors
The Government intends to implement new legislation targeting company directors who strike off and dissolve companies, leaving creditors out of pocket.
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (the Bill) had its second reading on 28 June 2021.
Whilst these concerns were first consulted upon in 2018 the Bill is now being brought in quickly to combat possible misuse of the strike off procedure to avoid paying back bounce back loans. The Bill will extend the existing director disqualification regime to directors of dissolved companies.
The disqualification regime
The Insolvency Service has wide powers to obtain disqualification orders against unfit directors of insolvent companies, preventing them from acting as directors for a period of between two and 15 years.
However, where a company has been dissolved, a court application is needed to restore it to the register before any action can be taken against its directors. This creates an extra layer of procedure and cost for the Insolvency Service.
The new measures seek to address what has long been seen as a loophole by giving the Insolvency Service power to obtain disqualification orders against directors of dissolved companies without the need to restore them.
Abuse of the dissolution process
In many cases, the strike off procedure is an efficient and appropriate way for companies to be dissolved quickly and cheaply, without the time and cost of a formal insolvency process.
However, it has long been of concern that directors use this process to:
- avoid the scrutiny of the Insolvency Service and possible disqualification.
- shed liabilities whilst transferring assets to a new business – phoenixism;
- avoid an Insolvency Practitioner challenging prior transactions and investigating director conduct to establish if any claims can be made against them.
Who will the changes affect?
In a normal year there are around 17,000 corporate insolvencies and the Insolvency Service typically achieves about 1200 disqualification orders per annum.
By contrast, there are between 400 and 500,000 company dissolutions per year. Although the majority of these will be companies which have been appropriately struck off, this still represents a significant increase in the number of companies that will now be open to investigation by the Insolvency Service.
The Bill is intended to have a retrospective effect so that it can be applied to companies that were dissolved prior to the legislation coming into force. We presume this is designed to capture those companies struck off after receiving bounce back loans.
It has been reported that between 2000-2500 companies with unpaid bounce back loans have already been struck off and dissolved over the last year or so.
Directors should note that the Bill will also include the right to obtain compensation orders against directors forcing them to contribute to company losses.
Considerations for directors
The new legislation is intended to act as a deterrent and stop directors from using the dissolution process to avoid liabilities and scrutiny of their conduct.
It is unclear though how the Insolvency Service (whose resources are finite) will fund this and how it will prioritise those cases to investigate. They are likely to be reliant on creditor complaints.
Anecdotally we have seen an increase in HMRC objections to strike offs and much closer scrutiny by the Banks. There will almost certainly be an emphasis, at least in the short term, on those companies which have been dissolved with unpaid bounce back loans.
Directors need to know that their actions may now lead to disqualification, possible personal liability via a compensation order, and increased scrutiny that they have properly followed the strike off procedure.
Directors do not always appreciate that there are criminal sanctions for failing to adhere to the procedure for strike off. Until now, there has been little risk in pursuing this option. It remains to be seen how real the risks will be going forward but directors should be careful and take advice when considering any end of life route for their company.
Please contact one of the team at Leonard Curtis Legal for advice and support on this and other legal issues.