NEW INVESTIGATIVE POWERS TO BE GIVEN TO INSOLVENCY SERVICE
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (the Bill) is currently working its way through Parliament and is at the committee state.
The Bill seeks to introduce new powers for the Insolvency Service to investigate the conduct of directors of dissolved companies and to recommend their disqualification.
Currently, the Companies Act 2006 allows directors to apply for the voluntary strike off and subsequent dissolution of a company. A company can be restored to the Register after its dissolution by way of an application. Such application must be made within six years of the date of dissolution.
The dissolution and restoration are governed by section 1003 and 1029 of the Companies Act 2006 respectively.
This system has provided a convenient way for companies and their directors to bury a company with issues and avoid investigation. Currently, the Insolvency Service has no automatic rights to investigate the conduct of directors/former directors of a dissolved company, and directors disqualification proceedings cannot be issued under the Company Directors Disqualification Act 1986. Insolvency Service investigations and directors disqualification proceedings are therefore currently limited to companies that are active or those that are insolvent.
Often companies that are dissolved have used the process to off load debts and/or the directors then set up a new company and start again.
The new Bill
The Bill will allow the Insolvency Service in England and Wales and Northern Ireland to investigate directors and directors of dissolved companies without the company having to first be restored to the Companies Register.
It would appear that the Government is keen to plug this loophole and, no doubt, this is in part being introduced to assist the avoidance of the repayment of Government backed loans, provided because of the Coronavirus.
Once introduced, the Bill will operate retrospectively. Applying to both directors and former directors of a dissolved company and with the same potential disqualification periods of two to 15 years, if a director’s conduct is found to have been unfit. Compensation can be sought from both directors and former directors if their actions have led to losses for creditors.
This new level of investigation brings more scrutiny to directors who may already be operating in an uncertain environment due to Coronavirus. While the Government has made it clear that its main concern is to promote the economy, we have warned at our previous seminars that directors need to ensure that they act appropriately, even during the difficult times caused by the Coronavirus, and that their actions stand up to scrutiny. The Bill introduces implications which reinforce this.
Directors must continue to be careful.
Should you have any questions in relation to this article or want to discuss matters, please do not hesitate to contact the writer, Graham Mead, a partner in the firm’s dispute resolution team.