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Directors beware! New disqualification rules to curb abuse of the company dissolution process

New legislation to close a legal loophole that allows directors to dissolve their companies to avoid paying employees and creditors.

Current position

Currently, the Insolvency Service only has powers to investigate directors of active companies or those being placed into an insolvency process. For the Insolvency Service to take disqualification action against former directors of disqualified companies, it would need to make an application to the court to have the company restored. This is a costly and time-consuming exercise that delays the Insolvency Service’s investigative powers.

Changes

The new measures are conferred from the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 (“the Act”), which received Royal Assent on 15 December 2021.

Section 2 of the Act amends section 6, 7(2) (4), 8ZB(2) and 15A of the Company Directors Disqualification Act 1986. These amendments will come into force on 15 February 2022, save for section 7(4) amendments, which came into force upon the Act receiving Royal Assent.

The amendments extend the Insolvency Service’s current powers on behalf of the Secretary of State for Business, Energy & Industrial Strategy to investigate companies where there is evidence of wrongdoing.

The amendments also aim to prevent directors dissolving their companies without initiating a formal insolvency process to avoid paying creditors. The Act will confer powers on the Insolvency Service to investigate these rogue directors and apply to the court directly for a disqualification order and to seek a compensation order to pay compensation to creditors if a disqualification order is made. The power also extends to dissolved companies that were not insolvent.

Section 14 of the Act confirms its retrospective effect, which means that companies dissolved prior to the Act coming into force will not be exempt from investigation.  

Conclusion

It appears that the Act is primarily intended to target directors who have inappropriately wound-up companies after receiving Bounce Back Loans. This reflects the Government’s commitment, made earlier in the year, to take action against COVID-19 fraud.

The Act will be of interest to Directors’ and Officers’ Liability (“D&O”) insurers as the Insolvency Service’s new powers are likely to result in an increased number of investigations into the directors of dissolved companies. The terms of each D&O policy will vary but may respond to the directors’ costs of dealing with an investigation post-dissolution.

It would be sensible for directors to seek advice in advance of taking steps to dissolve any company. If you require advice on this issue or on directors’ duties more generally, please contact our Insolvency and Recoveries team who have a breadth of experience in relation to issues faced by directors both from a commercial and regulatory perspective.

For further information, please contact our restructuring and insolvency department

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