The simplicity of dissolving a company has made the current system open to abuse, particularly during the Coronavirus pandemic. As a result, a proposed Bill will provide the Insolvency Service with powers to investigate directors of dissolved companies, closing a legal loophole in the dissolution process. If you are worried about being investigated, you should instruct the help and expertise of a specialist commercial lawyer right away. Get in touch today.
The current dissolution procedure
The current system for dissolving a company is quick, cheap and easy - making it a much more attractive option than entering into liquidation. To dissolve a company under the existing regime, the directors must simply sign a form to send to Companies House and pay a £10 administration fee. They must also publish a notice of proposed striking off in the Gazette. If no objections are raised to the striking off of the company, the company will be dissolved with a further notice of dissolution published.
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill is designed to close a loophole in the existing law by widening the government’s powers to investigate and disqualify directors under the Company Directors Disqualification Act 1986. Not only can former directors be investigated under the new rules, they can also be disqualified without the need to restore them to the register.
The new bill, if passed, will set out that a court order can be made against a disqualified director where the director’s conduct has caused loss to any creditors of a dissolved company.
How dissolution could be misused during Covid
The Insolvency Service regularly receives complaints, mainly from creditors, about directors who have misused the dissolution system. Misuse of the dissolution process has been common throughout the Covid-19 pandemic. For example, one of the only qualifications for dissolution under the current system is that a company has not traded in the last three months, which was easy to prove during the pandemic. Other ways in which dissolution could be misused include:
Phoenixism
A common misuse of dissolution is a practice known as ‘phoenixism’. Named after the mythical phoenix which rose from the ashes, phoenixism is often used by companies in financial trouble to avoid paying debts. The company will be dissolved, allowing the company to escape any debts owed, lease agreements, employee contracts etc., but it is then set up again - in most cases with the same assets and operating in the same location.
Avoiding liquidation
Not all practices are deliberately malicious. In many cases, directors choose to dissolve a company simply because it is much easier than the liquidation process, even though they perhaps know the liquidation process is the most appropriate route.
However, in certain circumstances, directors may decide to dissolve the company rather than enter into liquidation to avoid investigation into their conduct under the Company Directors Disqualification Act 1986. The Act provides government bodies with the power to investigate company directors and also to apply for a court order disqualifying an individual from serving as a director for up to 15 years.
Bounce Back Loan Schemes
Most recently, it has become clear that directors have abused the dissolution system to avoid paying back government loans they were given by the government to support them through the Covid-19 pandemic.
What sanctions could a director face under these new powers?
The provisions set out in the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill will enable the Insolvency Service to investigate former directors conduct, even after a company has been dissolved. The Insolvency Service may then bring disqualification proceedings against directors under the Company Directors Disqualification Act 1986.
If the proceedings determine that the director’s conduct makes them unfit to participate in the management of a company, they may be disqualified from acting as a director for a period of anywhere between two years and 15 years. Directors may also be made to pay compensation to creditors if their conduct has caused them loss.
Contact our Specialist Director Disqualification Solicitors in Central London Today
At Lewis Nedas Law, we have many years of successful experience when defending these types of proceedings in both the civil and criminal courts. For further information or to speak to one of our top directors’ disqualification solicitors, please call us on 020 7387 2032 or complete our online enquiry form.
