The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act (“Act“) received royal assent on 15 December 2021.
The Act extends the scope of powers available to the Insolvency Service to address the issue of directors dissolving companies to avoid paying their liabilities.
The Government’s Business Secretary, Kwasi Kwarteng, has made it clear that the introduction of the Act is motivated by the Government’s suspicions that some directors will seek to avoid repaying Government-backed loans made during the course of the Coronavirus pandemic, amongst other debts.
The Act extends the scope of powers available to the Insolvency Service in order to allow it to investigate and, if appropriate, disqualify company directors who abuse the company dissolution process.
Prior to the introduction of the Act, the Insolvency Service’s powers to investigate were limited to directors of companies that entered into an insolvency process (including administration and liquidation), as well as to the affairs of active companies.
The Act extends those investigatory powers to the conduct of former directors of dissolved companies.
In the event that misconduct is found, sanctions available to the Insolvency Service include disqualifying a director from acting as a company director for a period up to 15 years and, where the misconduct is particularly extreme, prosecution.
The Business Secretary will also be able to apply to the court for an order requiring a disqualified former director of a dissolved company to pay compensation to creditors who have lost out due to the former director’s fraudulent behaviour.
Historically, creditors have had little recourse in circumstances where directors have abused the company dissolution process. Although the dissolution process does incorporate a notice period in which creditors may object to the dissolution continuing, it is common for creditors to be completely unaware of the company’s proposed dissolution.
If creditors fail to object in time, they have few options for redress, and those in existence prior to the introduction of the Act do not adequately protect or benefit low-value (often trade) creditors.
While creditors have been entitled to bring court proceedings to restore the company to the register at Companies House, this has been widely regarded as time-consuming and prohibitively expensive. Where fraud is alleged, it is also possible to make a report to the Serious Fraud Office (SFO); however, such reports have rarely attracted the attention of the SFO, which is more focussed on complex, high-value fraudulent behaviour.
The Act will serve as a deterrent to directors considering abusing the company dissolution process to avoid settling companies’ liabilities and, where directors are not sufficiently deterred, the basis on which to investigate and sanction those directors.
The Act does little to expand on creditors’ options for redress; rather, it seems designed to bolster the Government’s ability to hold directors to account in relation to loans made during the course of the Coronavirus pandemic.
It does, however, raise the prospect of aggrieved creditors appealing directly to the Business Secretary and/or the Insolvency Service for investigations into particular directors. It remains to be seen to what extent the Insolvency Service will have the requisite resource or political appetite to investigate such appeals.