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Rogue directors that dissolve their company to avoid debt

On 15 December 2021 The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 gained royal assent

Relevant across multiple law types

Rogue directors who dissolve their companies and avoid paying liabilities to staff, creditors and the taxpayer can now be disqualified from being a director.

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act will also help tackle directors dissolving companies to avoid repaying Government backed loans put in place to support businesses during the Coronavirus pandemic.

Business Secretary Kwasi Kwarteng said:

“We want the UK to be the best place in the world to do business and we have provided unprecedented support to businesses to help them through the pandemic.”

“These new powers will curb those rogue directors who seek to avoid paying back their debts, including government loans provided to support businesses and save jobs. Government is committed to tackle those who seek to leave the British taxpayer out of pocket by abusing the covid financial support that has been so vital to businesses.” 

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This Act will come into force on 22 February 2022 but it will have retrospective effect and so is of interest to any former director who dissolved their company when a formal liquidation process should have been used, and where financial assistance was obtained but not applied for the purposes for which it was paid.

In October 2021 the financial and other relief measures temporarily granted to companies, and their directors, started to be phased out, but at the same time both the Government and the Insolvency Service began to look at the wrongful activity of some directors, whether innocently or otherwise, regarding the use of the funds received, particularly where the company was later dissolved.

Dissolution is a means of bringing a company to an end without first going through a formal solvent or insolvent liquidation process. In effect it will mean that the normal investigations, which take place on liquidation, regarding the distribution of profits, assets and payments to directors from company funds will not take place. Instead the company is dissolved without further enquiry into its financial circumstances.

There have been a number of high profile cases where directors had claimed bounce back loans and then wrongly transferred the money out of the company before dissolving it. There were other cases where bounce back loans were obtained fraudulently, based on false or misleading information. The Insolvency Service has begun, and will continue, to investigate these cases and commence director’s disqualification proceedings against offending directors.

As the extent of the abuse of the financial relief measures became clear, the Government introduced additional measures to give the Insolvency Service more power to investigate, and if appropriate, take action to disqualify wayward directors and also to discourage the continuation of the practice, by giving the court power to order the directors to pay compensation to the unpaid creditors of the company.

The new legislation will come into force in the main, in February 2022 but will be applied retrospectively, giving the Insolvency Service the power to look into the activity of all companies which received financial assistance during the pandemic and then dissolved. 

The Insolvency Service will have powers to investigate directors of companies that enter a form of insolvency, including administration and liquidation. The Insolvency Service may also be instructed to investigate live companies where there is evidence of wrongdoing.

This Act extends those investigatory powers to directors of dissolved companies and if misconduct is found, directors can face sanctions including being disqualified as a company director for up to 15 years or, in the most serious of cases, prosecution.

In addition, the Insolvency Service will have the right to ask the court to order directors to personally pay compensation to creditors of their former company.

Any former or current director of a company considering dissolution or liquidation would be well advised to take advice on their personal legal position, as well as that of the company, before taking any steps to close a company.

A commercial law specialist can provide legal advice and assist directors and their companies on the impact and effect of this new legislation. You can search for a commercial law specialist for free and without providing any of your personal data on our website.