A new bill, which the UK Government introduced to Parliament on 12 May 2021, seeks to extend the existing directors’ disqualification regime to the directors of dissolved companies.
Currently, the conduct of directors of live or (more typically) insolvent companies can be investigated by the Insolvency Service (on behalf of the Secretary of State) who, if the standards of a director’s conduct is found to have been lacking, can apply to court to have that director disqualified. However, if the Insolvency Service wishes to investigate the conduct of the directors of a company which has been dissolved, that company must first be restored to the register. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill ('the Bill') would do away with this costly and time-consuming hurdle, by amending the Company Directors Disqualification Act 1986 to allow investigations of, and disqualification proceedings to be brought against, such directors.
The Government’s stated intention by introducing this change in the law is to combat three heads of complaint that the Insolvency Service regularly receives with regards to the directors of dissolved companies. First, that a company has been dissolved so that its directors can avoid an investigation of their conduct. Second, phoenixism, whereby a company is dissolved to allow it to shed its liabilities with the business of that company transferred to a new company. Third, 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.
While the Bill should go some way to tackle the issues the Government identifies, the new regime for dissolved companies will suffer from the same problem as the current regime for live companies: the requirement that an interested party, most likely a creditor, raises concerns about the conduct of the company’s directors with the Insolvency Service. While directors are required to notify the actual, contingent and prospective creditors of a company of that company’s proposed dissolution, and such creditors have an opportunity to object to the proposed dissolution before it takes effect, not all such creditors may be notified in practice (if, for example, certain creditors were unknown to the directors or if the directors don’t follow the proper process). 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 Insolvency Service. This makes it more likely that only particularly egregious examples of misconduct, significant enough to come to the attention of an interested party, will be investigated in respect of directors of dissolved companies.
The Government has been clear, in the response to its Insolvency and Corporate Governance consultation in 2018 in which this proposed change to the law was first raised, that its intention is that dissolution should not be an alternative to formal insolvency proceedings. The Bill certainly goes some way to reinforcing this position. However, this should not mean, and nor is it meant to mean, 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.
The Bill is intended to take effect retrospectively: the conduct of directors of dissolved companies which occurred prior to the Bill passing into law can be investigated, and disqualification action may be taken with regard to that conduct. This is not quite as open ended as it seems. Currently, under the Company Directors Disqualification Act 1986, the Insolvency Service can only make an application for a disqualification order within three years of the relevant company entering an insolvency process, unless otherwise directed by the court. The Bill would apply a similar regime, with the three year look back period starting from the date the relevant company was dissolved.
The Bill is scheduled to have its second reading in the House of Commons on 15 June 2021. Should the Bill become law, it should give directors of a company who are considering dissolution as a way to avoid scrutiny of their actions pause to think. The Government has made its position clear: dissolving a company is not a way for directors to avoid the consequences of their misconduct.