The conduct of directors of live or insolvent companies can be investigated by the Insolvency Service on behalf of the Secretary of State who, if they found the standard of the directors’ conduct had been lacking, could apply to the Court to have the director disqualified. Prior to the Act, if the Insolvency Service wished to investigate the conduct of a director of a company which was dissolved, the company must first have been restored to the register. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 removes this hurdle by amending the Company Directors Disqualification Act 1986 to allow investigations of and disqualification proceedings to be brought against such directors.
The intention of this Act was to combat three heads of complaints regularly received by the Insolvency Service:
- where a company has been dissolved so that its directors can avoid an investigation of their conduct
- where a company is dissolved to allow it to shed its liabilities, with the business transferred to a new company
- where the directors using the company dissolution process as an alternative to formal insolvency to reduce cost and avoid the scrutiny of their conduct that would come with formal proceedings.
The new Act will tackle the issues the government identifies, however, the new rule for dissolved companies will face the same problem as the previous rule for live companies, namely the requirement that an interested party, like a creditor, raises concerns on the conduct of a director with the Insolvency Service.
There is a requirement that directors must notify the actual, contingent, and prospective creditors of the proposed dissolution. However, not all directors may be notified in practice, for example, where they do not follow the correct procedure or where the creditors were unknown to the directors. Once a company is dissolved, there is no liquidator or administrator of an insolvent company who has a duty to investigate the conduct of directors and report this. Therefore, it is likely that only particularly extreme examples of misconduct which come to the attention of an interested party will be investigated.
The change of law was first raised in 2018 when the government had a clear response to its Insolvency and Corporate Governance consultation, at which point the change of law was first raised. The intention was dissolution should not be an alternative for formal insolvency proceedings. This does not mean that in appropriate circumstances dissolution will not represent an efficient way to end the life of a company, even where the company is cash flow or balance sheet insolvent.
The Act takes effect retrospectively, allowing the conduct of directors of dissolved companies which occurred prior to the Act to be investigated and disqualification action taken. Currently, under the Company Directors Disqualification Act 1986, the Insolvency service can only make an application for disqualification within three years of the company entering an insolvency process. The Act applies a similar principle with the three-year period starting from the date the company was dissolved.
The government is clear that dissolving a company is not a way for directors to prevent consequences of their wrongful conduct. Therefore, with the Act now in place, it should give directors of a company who consider dissolution to avoid scrutiny of their action reason to think and deter them from taking such measures.
