The Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Bill – What is it and what does it mean for directors?

Understanding the new Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Bill for company directors

New legislation has been granted Royal Assent meaning former directors can be subject to disqualification even after a company has been dissolved.

Currently, 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 Bill, however, closes this loophole by expanding the government’s power to investigate and disqualify a director from acting in this role in the future if it can be shown their behaviour has fallen short of the standards expected. When creditors have suffered a financial loss due to the conduct of a disqualified director, a court order can be made to make the director personally liable for these losses.

Why directors opt for dissolution

Dissolving a company, also known as striking off, is a quicker and cheaper way of closing down an unwanted limited company, as opposed to opting for a formal liquidation procedure. It is achieved through submitting a simple application form (known as a DS01) to Companies House, along with the relevant nominal fee. So long as no objections are received, the company will be dissolved after two months, and its name will be struck off the register held at Companies House.

While dissolution is only appropriate in certain circumstances, the process is open to misuse by companies who don’t necessarily meet the criteria. One of the potential areas for misuse is when a business with outstanding debts applies for the company to be dissolved so it can engage in a practice known as “Phoenixism”

Phoenixism and company dissolution

Phoenixism occurs when a company is dissolved with outstanding debts and liabilities, only for a new company to be set up by the former directors often trading under a similar name, offering the same services or products, and often using the same assets.

While instances of phoenixism often leaves those running the company in a better financial position, in the vast majority of cases, the creditors of a dissolved company are left in a worse position that if the company was formally liquidated through the correct channels. This is because when a company is liquidated by an insolvency practitioner, all assets belonging to the company are identified before being sold for the benefit of creditors. All proceeds are then distributed to outstanding creditors based on a hierarchy of payment as set out in the Insolvency Act 1986.

So why are the government taking action now?

Current concerns are that the dissolution process could be used by directors looking to avoid repaying government-backed borrowings – such as Bounce Back Loans – which were made available during the Covid-19 pandemic. As the government provided full security to the banks in the event of non-repayment, there is a huge incentive for them not to let companies easily escape their liability.

With over £2bn worth of these loans taken out during the height of the pandemic, the government stands to lose a lot if directors are simply allowed to strike off their company, free themselves of existing liabilities, and set up a new company with a clean financial slate.

What the new Bill will mean for company directors

Thanks to the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, the government now has enhanced powers to investigate and disqualify existing directors and also former directors of dissolved companies. Court orders are 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, you should seek advice from a licensed insolvency practitioner. They will be able to talk you through your options and advise you on the best course of action going forward. You can arrange a free no-obligation consultation with a licensed insolvency practitioner at your nearest Begbies Traynor location for immediate help and advice.