A new Act, which received Royal Assent on 15 December 2021, extends the existing directors’ disqualification regime to the directors of dissolved companies.
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 were found to have been lacking, could apply to court to have that director disqualified. Prior to the Act becoming law, however, if the Insolvency Service wished to investigate the conduct of the directors of a company which had been dissolved, that company must first have been restored to the register. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 ('the Act') does 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 substantial majority of the provisions of the Act relating to directors’ disqualification will come into force two months after 15 December 2021, when the Act received Royal Assent.
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 Act 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 previous 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 change to the law was first raised, that its intention is that dissolution should not be an alternative to formal insolvency proceedings. The Act 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 Act takes effect retrospectively: the conduct of directors of dissolved companies which occurred prior to the Act 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 Act applies a similar regime, with the three year look back period starting from the date the relevant company was dissolved.
Now that Act has 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.
The Government has made its position clear: dissolving a company is not a way for directors to avoid the consequences of their misconduct.