Amongst the new bills being introduced to Parliament there is one which caught our eye – this being the one introduced on 12 May 2021, seeking to extend the existing directors’ disqualification regime to the directors of dissolved companies, snappily entitled the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (‘the Bill’).
The Bill is scheduled to have its second reading in the House of Commons on 15 June 2021 and is intended to take effect retrospectively. However in reality this will be a three year ‘look back’ period starting from the date the relevant company was dissolved.
As you may know directors of live or (more typically) insolvent companies can be investigated by the Insolvency Service (IS), on behalf of the Secretary of State. If the standards of a director’s conduct is found to have been lacking, the IS can apply to court to have that director disqualified.
However, if the IS wants to pursue a director, firstly that company must be restored to the register.
The take away here is that the Bill is proposing to do away with this costly and time-consuming hurdle, to allow investigations of, and disqualification proceedings to be brought against, such directors.
Why the change? Primarily, this is to tackle three issues that the IS regularly comes across:
- The longstanding Phoenix problem, whereby a company is dissolved to allow it to shed its liabilities with the business of that company transferred to a new company.
- That a company has been dissolved so that its directors can avoid an investigation of their conduct;
- That directors are using the company dissolution process as an alternative to formal insolvency proceedings to reduce cost and avoid the scrutiny of their conduct that comes with such formal proceedings.
However, the regime for dissolved companies will still have the requirement that an interested party, most likely a creditor, raises concerns about the conduct of the company’s directors with the IS.
While directors are required to notify actual, contingent and prospective creditors of a company of that company’s proposed dissolution, the fact remains that if, for example, certain creditors were unknown to the directors, not all such creditors may be notified.
Once a company has been dissolved, there is no equivalent of a liquidator or an administrator of an insolvent company, who has a duty to investigate the conduct of directors and directors and report to the IS.
It seems to us that the direction of travel is very much that dissolving a company is not a way for directors to avoid the consequences of their misconduct. However, it still feels that only particularly severe examples of misconduct, significant enough to come to the attention of an interested party, will be investigated in respect of directors of dissolved companies.
It also leaves dissolution open which seems right us, but makes the case that in appropriate circumstances dissolution will no longer represent an efficient way to end the life of a company even where that company is cash flow or balance sheet insolvent.
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