Dissolved companies – Insolvency Service to be given new powers against directors

The Government is planning a clampdown on company directors who seek to take advantage of the company dissolution process to avoid paying creditors and/or leave staff out of pocket.

On 12 May 2021, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill had its first reading in the House of Commons.

If the Bill is passed, amendments will be made to various sections of the Company Directors Disqualification Act 1986 (“DDA”).

Under the proposed legislation, the Insolvency Service will be given new powers to investigate the conduct of company directors, including former directors, of dissolved companies. The new Bill should help to close a legal loophole and act as a deterrent against misuse of the dissolution process.

The new measures will help to prevent directors of dissolved companies from:

dissolved companies

What is the current legal loophole?

When a company is insolvent, the directors of the company have a duty to act in the best interests of creditors so the directors will normally instigate the process of liquidating the company. This is known as a creditors voluntary liquidation (CVL).

Despite a CVL being the most appropriate route to close an insolvent company, directors sometimes opt to apply for the company to be struck off at Companies House instead.  This involves informing creditors of the intention to strike off the company and filing a form of application to instigate the strike off. 

This is where the current loophole exists – with the creditors voluntary liquidation (CVL) process, a licensed insolvency practitioner is given the duty to review the financial affairs and transactions of the company as well as the conduct of its directors.  However, where a company is dissolved by way of strike off, it bypasses this process and any wrongdoing will often be overlooked.

How will the new legislation avoid this loophole?

The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill will enable the Insolvency Service to take on the role that an insolvency practitioner would have regarding the review of a directors conduct for directors of companies that have been dissolved using the strike-off process. 

What will the penalty be if there is evidence or misconduct?

Under the proposed legislation, directors who are found to have misused the dissolution process could face disqualification of up to 15 years. These powers will be exercised by the Insolvency Service on behalf of the Business Secretary.

Business Secretary Kwasi Kwarteng said:

“As we build back better from the pandemic, we need to restore business confidence, but also people’s confidence in business – which is why we will not hesitate to disqualify directors who deliberately leave employees and the British taxpayer out of pocket.

We are determined that the UK should be the best place in the world to do business. Extending powers to investigate directors of dissolved companies means those who have previously been able to avoid their responsibilities will be held to account.”

What is the best closure route for insolvent companies?

Formal Liquidation is the optimal closure route for directors of companies with existing liabilities. This process requires directors to meet their legal obligations once the company becomes insolvent and ensures creditors are treated fairly.

Next step

The second reading of The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill is due to take place on 15 June, 2021.

If you need advice on any of the above matters, please do not hesitate to contact us.

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