New Powers To Tackle Unfit Directors Of Dissolved Companies

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On 12 May 2021, it was confirmed that The Insolvency Service will be given powers to investigate directors of companies that have been dissolved, closing a legal loophole and acting as a strong deterrent against the misuse of the dissolution process.

What Was The Loophole?

When a company closes it is necessary for it to be dissolved at Companies House.  If the company is solvent, i.e. it can pay its liabilities in full, this can be achieved by way of a members voluntary liquidation (MVL) or simple strike-off process by filing a form with Companies House.  For a more in-depth comparison between the two options, please read our previous article MVL Vs Strike Off – Which Is Better For Solvent Companies?

When a company is insolvent, i.e. unable to pay its liabilities as they fall due, the directors of the company have a duty to act in the best interests of creditors.  This means that the directors should look to utilise a formal restructuring or insolvency process, such as a liquidation.  Where the directors instigate the process of liquidating their company, this is known as a creditors voluntary liquidation (CVL).

Despite a CVL being the most appropriate route to close an insolvent company, directors sometimes opt to apply for the company to be struck off at Companies House instead.  This involves informing creditors of the intention to strike off the company and filing a form to instigate strike off.  Applying to strike off an insolvent company is often frowned upon but it is perfectly legal and common.  For a more in-depth comparison between the two options, please read our previous article CVL Vs Strike Off – Which Is Better For Insolvent Companies?.

So what is the issue with this?  In short, the licensed insolvency practitioner in a creditors voluntary liquidation process has a duty to review the financial affairs and transactions of the company as well as the conduct of its directors.  This could lead to additional realisations being identified for the benefit of creditors or the directors being disqualified from acting in the promotion, management or formation of any other business for a period of 2-15 years where there is evidence of unfit conduct.  By comparison, where a company is dissolved by way of strike off, it bypasses this process and any wrongdoing will often be overlooked.

When a voluntary liquidation concludes, the Liquidator (the insolvency practitioner) files a document at Companies House to trigger the dissolution of the company.

How Has The Loophole Been Closed? 

The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill was published on 12 May 2021.  It enables the Insolvency Service to take on the role that a Liquidator would have regarding the review of a directors conduct, but for directors of companies that have been dissolved using the strike-off process rather than a formal insolvency process. 

The Directors Disqualification Measure implements a policy first announced in August 2018. The Government announced it would implement when Parliamentary time allowed and was introduced on 12 May in part to deliver on measures to combat Bounce Back Loan fraud as announced in Budget 2021.

The Government has been very clear in its stance, being that the strike-off process will no longer be able to be used as a method of fraudulently avoiding repayment of Government-backed loans given to businesses to support them during the Coronavirus pandemic.

The measure will also help to prevent directors of dissolved companies from setting up a near-identical business after the dissolution, often leaving customers and other creditors, such as suppliers or HMRC, unpaid.

Business Secretary, Kwasi Kwarteng, said:

“As we build back better from the pandemic, we need to restore business confidence, but also people’s confidence in business – which is why we will not hesitate to disqualify directors who deliberately leave employees and the British taxpayer out of pocket.

We are determined that the UK should be the best place in the world to do business. Extending powers to investigate directors of dissolved companies means those who have previously been able to avoid their responsibilities will be held to account.”

Dr Roger Barker, Director of Policy and Corporate Governance at the Institute of Directors, said:

“Company directors fulfil a central role in ensuring that their businesses are well-governed. Although corporate dissolution may be inevitable in some cases, it should only be used as a last resort – after all other realistic avenues for protecting the interests of stakeholders have been exhausted. Using company dissolution as a mechanism for the evasion of a directors’ duties has no place in the governance of a responsible enterprise.”

Considering Closing An Insolvent Company?

If you are considering dissolving an insolvent company we strongly advise that you explore your options with a licensed insolvency practitioner at the earliest opportunity.  We understand the attractive nature of the strike-off option, but the new measures introduced suggest that this will be a lot more complicated going forward.

At My Liquidation, we pride ourselves on providing simple, fast and effective advice to businesses in financial distress.  Furthermore, the initial conversations are free, confidential and come with no obligation.  With the increased risks now associated with the strike-off process, we would strongly urge directors to take us up on this offer.

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