The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill 2021-22 had its first reading in the House of Commons on 12 May 2021. This New legislation is being pushed through Parliament which will mean former directors can be subject to disqualification even after a company has been dissolved.
At present, if a company is closed down without going through a formal liquidation process, its directors will not be subject to a conduct investigation by the Insolvency Service through the Company Directors Disqualification Act 1986 (“CDDA”) unless the company is subsequently restored to the register. This new legislation is looking to close this loophole which means the government’s power to investigate and disqualify a director from acting in this role in the future could occur if it can be shown their behaviour has fallen short of the standards expected.
Why Dissolution is Considered?
Dissolution and Liquidation are two separate processes. Dissolving is a way to close down a company while it is still solvent and has the ability to settle its debts within a 12 month period. Liquidation is a process to close a company that is insolvent.
Dissolving a company, also known as striking off, is a quicker and cheaper way of closing down a limited company. It has been subject to much misuse where Directors often dissolve their business with outstanding debts and liabilities and then set up a new company often trading under a similar name, offering the same services or products, and often using the same assets.
Coincidence with Bounce Back Loans?
Bounce Back Loans were available up to March 2021 and provided up to £50,000 to help firms survive – they could only be used for business and not personal use. Failure to account for how a loan was used or using it for personal payments, can result in director disqualification or the extension of bankruptcy restrictions.
With over £2bn worth of Bounce Back Loans (BBL’s) being taken out during the height of the pandemic, the government is arguably ensuring companies do not escape their liability.
I commented on this very early when speaking with various accountants and contacts it is certainly noting that with them providing full security to the banks in the event of non-repayment, there is a huge incentive for them to ensure this loophole is closed. Whether they will be able to allocate the resources to progress however stands to be seen.
What the new Bill will mean for company directors
The Bill is currently in the 3rd Reading of The House of Lords but should it achieve Royal Assent, the government will receive enhanced powers to investigate and disqualify existing directors and also former directors of dissolved companies. Court orders will also be able to be made against disqualified directors ordering them to pay compensation to creditors who have suffered losses due to their behaviour.
The new Bill means that companies will not need to be restored to the register before this action can be taken as is currently the case. This is predicted to lead to a significant increase in investigations conducted into the conduct of directors of dissolved companies, as well as the number of disqualification orders issued.
Directors of insolvent companies must therefore think very carefully if they are considering dissolving their company rather than opting for a formal liquidation process. Misuse of the dissolution process could have severe repercussions for directors even after their company has been struck off.
If your business is insolvent, or you fear it may soon become so, or you are worried about your Bounce Back Loan, then contact us at Lucas Ross – Business Rescue, Recovery & Insolvency for a free no-obligation consultation. We will talk you through your options and advise you on the best course of action going forward.
