Disqualification of Directors of Dissolved Companies
New Bill to extend Disqualification Order powers.
A not-infrequent lament of an unpaid creditor goes something along the lines that the debtor company appears to be insolvent, that the creditor doesn’t wish to throw good money after bad, that the principle of limited liability makes it impossible to pursue the director personally and, sometimes, that to rub salt in the wound, the director has set up a new “phoenix” company through which he or she now appears to be intent upon trading. There are limits on the ability of directors to do this, because if the name of the new company is the same as or similar to that of the old company, the director concerned may be committing a criminal offence and may face personal liability for the company’s debts, via sections 216 and 217 of the Insolvency Act 1986. One proviso is that the old company must have been placed into insolvent liquidation.
The director may be attempting to cover his tracks, as it were, by going through the process of dissolving the old insolvent company, without first placing it into liquidation, such that the unpaid creditor won’t even have the comfort of knowing that the circumstances of the company’s failure have been looked into by a liquidator or the official receiver. Nor, then, will the director be at risk from sections 216 and 217 of the Insolvency Act 12986.
There won’t be the prospect, either, that the director will be disqualified under the Company Directors Disqualification Act 1986 because, at present, directors of companies are exposed to potential disqualification action only if a company of which they have acted as a director enter into insolvent liquidation or into administration (or administrative receivership). Directors of companies that are simply dissolved without first being liquidated (or administration/administrative receivership) are not susceptible to attack.
It is possible to dissolve an insolvent company without first going through a liquidation/administration process. The risk that a liquidator, or the official receiver, may recommend that disqualification action be taken could, to a director harbouring such concerns, incentivise the following of such a course. Whilst there is an opportunity for creditors to delay the process, ultimately, they cannot prevent it from happening (without petitioning for the compulsory winding up of the company concerned). A creditor may also seek the restoration of a company, post-dissolution, with a view to the company being placed into liquidation and a liquidator being appointed, but the cost of so doing (and of potentially having to fund the liquidator) may well act as a disincentive.
However, a government bill – the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) – had its first reading in the House of Commons on 12 May 2021. Once enacted and subsequently brought into force, extending the circumstances in which disqualification action can be brought to include cases where companies are dissolved without first being liquidated or placed into administration (or administrative receivership). In particular, the Secretary of State (BEIS) will be able to make an application to court in respect of anyone who was such a director of a company where their conduct makes them unfit to be concerned in the management of a company. The court has a duty to make a disqualification order of appropriate length if it is satisfied that the Secretary of State’s contentions are justified.
Whether the closure of this “loophole” will directly translate to more directors facing disqualification action, or fewer dissolutions of impecunious companies that haven’t been through insolvency processes – remains to be seen. Quite what surveillance mechanisms will be used to identify suitable cases also remains to be seen, but the Secretary of State may be reliant on reports from disgruntled creditors.
Disclaimer: this article is not to be relied upon as legal advice. The circumstances of each case differ and legal advice specific to the individual case should always be sought.