Earlier this year, the government announced that The Insolvency Service will be given powers to investigate the directors of dissolved companies. In this article, we discuss why this is considered necessary and what it means.
There are two main ways to close a company and bring its affairs to an end.
Firstly, there is a formal insolvency process, such as a liquidation, where an insolvency practitioner is appointed to wind up the affairs of the company.
Secondly, the company itself can be “struck off” from Companies House, which is the register for all companies, and then dissolved.
In all formal insolvencies, the appointed insolvency practitioner is required to submit a report on the conduct of the directors to the Insolvency Service. The Insolvency Service is a government department that reviews all these reports and may take action to disqualify a director who has acted in such a way that was unfit. Directors can be disqualified from acting as a director for up to 15 years.
Currently, if a company is ended via the strike off and dissolution route, the Insolvency Service do not have the power to review the conduct of the directors and get them disqualified if there is unfit conduct.
This loophole has always been criticised as it allowed directors of dissolved companies to form a business that is nearly identical to the previous one after dissolution, known as “phoenixism”. This often leave customers and other creditors, such as suppliers or HMRC, unpaid. The Government backed Bounce Back Loans during the Coronavirus pandemic brought the loophole into sharp focus. It was perceived that many companies were set up, bounce back loans obtained, spent and then the company dissolved i.e., as a method to fraudulently avoid repayment of government backed loans given as support during the pandemic.
The legislation is currently at draft stage and it is expected that the Ratings (Coronavirus) and Directors Disqualification (dissolved companies) Bill will be introduced next year. However, the provisions are backward-looking, so give the Insolvency Service the right to challenge directors who have already dissolved companies.