The Insolvency Service now has extended powers in relation to directors dissolving companies to avoid paying their liabilities. These powers were granted under the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act, which was given royal assent on 15 December 2021.
This Act was created because of suspicions that some directors would seek to avoid repaying government-backed loans that were provided to assist companies during the coronavirus pandemic, as well as other debts.
The Act enhances the powers available to the Insolvency Service to investigate and, when appropriate, disqualify company directors who abuse the company dissolution process.
Before the Act came into effect, the Insolvency Service’s powers to investigate were limited to directors of companies that went into an insolvency process whether that was administration and liquidation and to the affairs of active companies.
The Act, however, extends those investigatory powers to cover the conduct of former directors of dissolved companies.
Sanctions
If evidence of misconduct is found, the sanctions available under the Act to the Insolvency Service include disqualifying a director from acting as a company director for up to 15 years and prosecution in the most serious of cases.
The Business Secretary will also can make a Court application for an order requiring a disqualified former director of a dissolved company to pay compensation to creditors who have lost out due to that director’s fraudulent behaviour.
The Act, therefore, will serve as a deterrent to directors who may be thinking of abusing the company dissolution process to avoid meeting their company’s liabilities.
Prior to the new Act, creditors could do little to recover what they were owed if directors abused the dissolution process. The process includes a notice period for creditors to object to a company’s dissolution going ahead. But this has often been ineffective as, in many cases, creditors were not made aware of the company’s planned dissolution.
If creditors failed to object in time, there was little they could do to try and recoup what they were owed, with low-value creditors in particular having little protection.
Although it has been possible for creditors to bring Court proceedings to have the company restored to the Companies House register, this is often too time consuming and expensive to be a realistic option.
Another option has been to report any suspicions of fraud to the Serious Fraud Office (SFO). But the SFO tends to concentrate on complex, high-value investigations, and is unlikely to devote resources to smaller-scale allegations.
Appeals
The Act does not offer creditors a new range of ways to seek redress for their losses. But it does enhance the government’s ability to hold directors to account. It may also lead to creditors appealing to the Business Secretary and/or the Insolvency Service for investigations to be started into certain directors. This could be of use to the creditors if the Business Secretary then applies for one of the aforementioned Court orders compelling a director of a dissolved company to pay creditors what they are owed.
At this stage, however, it is unclear whether the Insolvency Service will have the resources or enthusiasm to pursue such investigations.
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