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New provisions come into force on 15 February 2022 for directors of dissolved companies to face disqualification action.
At the moment, the Insolvency Service has the power to investigate directors of live companies and those entering into a form of insolvency.Directors can face sanctions, including a ban from acting as a director for up to 15 years. There is currently no such power to investigate and take action against the directors of a company that is dissolved, whether as a result of a voluntary striking off or a compulsory striking off. In 2020 to 2021 there were 437,790 dissolutions in the UK.
The improper dissolution of a company is already a criminal offence, punishable with a fine, under sections 1104 and 1005 of the Companies Act 2006.However, in its Impact Assessment in 2020 the Insolvency Service highlighted that there was no power for the Insolvency Service to investigate and address abuse of the dissolution procedure by directors without restoration of the company to the register, which is a cumbersome and costly process involving court proceedings. The Insolvency Service said that rogue directors knew that they could avoid scrutiny and potential enforcement action by dissolving their company.
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 is designed to make provision in connection with the disqualification of directors of companies that are dissolved without becoming insolvent. By amending the Company Directors Disqualification Act 1986, the Act plugs a gap in the legislation and means that if a court is satisfied that a director’s conduct makes them unfit to be concerned in the management of a company it would have a duty to make a disqualification order.Once made, the order bans that person from acting as a director or taking part in the management of a company for up to 15 years. The Act includes a power to require the provision of information or documentation relating to the conduct of a former director of a dissolved company. Compensation may be sought where a former director’s conduct in that company has caused losses to creditors.
A director will no longer be able to avoid disqualification by dissolving their company without it going first into insolvency proceedings. The new provisions expressly apply to director conduct and to companies dissolved at any time before and after the provisions come into force, but the Insolvency Service can only make an application for a disqualification order within 3 years from the date the company was dissolved, except with leave of the court.
In the 2021 Budget the Government said that it will enforce and address bounce back loan fraud. We are already seeing action taken against directors of companies who are alleged to have misused bounce back loans. This is one further measure to enable this policy aim to be achieved.