HomeFWJ TakeawayShareholder and director servicesCorporate governanceCOVID-19 & increased director disqualification risks

Whilst I realise this may have a more serious impact on some companies/their directors than others, even for companies that are coming out of the pandemic in a good state, there may be risks relating to what you did (or thought you did) with this company or related companies during that period.

As addressed in my previous blogs, the disqualification of directors is a high priority for government (acting through an executive agency, the Insolvency Service). 

On 30 December 2020 the Financial Times reported the positive news of a surge in business start-ups across major economies, including the UK.  This news may not have been so positive, as it became apparent in the UK that the availability of loans and grants to companies (whereas unincorporated businesses needed three years of accounts) led to a huge surge in companies and respective applications.

  • historically, director disqualification claims were made against directors of insolvent companies.
  • however, the government has now focused on the start-up shut down companies which may have already existed or were newly set up to take advantage of these loans and grants, and then dissolved once the money came in.

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill 2021 is (as of writing) currently at its second reading in the House of Lords. Once passed (subject to amendments) it will be not long before it receives royal assent and becomes law.

Aside from dealing with ratings issues (which is not within the scope of this blog), this new legislation will widen the scope of director disqualification proceedings under the CDDA to enable the conduct of directors of dissolved companies (which were never placed into an insolvency process) to be investigated.

As a result, directors of companies dissolved during the pandemic could well find themselves facing disqualification. For some directors this may not affect them too heavily – particularly those reaching retirement, agreeing to be disqualified (which you can do without legal costs) or who do not have any other companies to run. 

  • the reason for this legislation is that the grants given during the pandemic are non-repayable and the CBILs and bounce back loans are less likely to be quickly pursued as the creditor (the bank) is government guaranteed. 
  • At Francis Wilks & Jones, we are unsure as yet what policy the banks are likely to adopt in respect of unpaid loans, but in practice we question the case they have for issuing legal proceedings when you can simply ask for payment from the government guarantor.

Accordingly, director disqualification will now become the tool of choice to protect the public interest – by focusing on loans and grants taken out without any legitimate purpose and disqualifying directors who have committed such wrongs.

While director disqualification was always in existence to protect the public interest (by preventing this behaviour being repeated by the wrongdoing director) that then begs the question: when are we going to have another similar pandemic when they could commit such wrongs again? 

Whilst I appreciate that current science anticipates more frequent occurrences of pandemics such as Covid-19, this is unlikely to be in the next 15 years (the maximum period of disqualification for a director).

However, that is not the only tool available to government. Legislation introduced during Vince Cable’s tenure as Business Secretary (introduced from October 2015) provides that where a director is disqualified then compensation can be sought (and is almost mandatory) from them.

In my next blog I will discuss the resurrection of compensation orders, a statutory remedy that did not have much impact at the time it was introduced but which may become the tool of choice to make directors of dissolved companies repay their CBILs and/or bounce back loans.

For more information on how this can impact directors, read our guide on director disqualification and bounce back loans.

Should you require any assistance relating to director accountability, contact our director services team. Whatever your situation, we have almost certainly seen it before and our experience can help you find the solution you need.

Francis Wilks & Jones acted with great professionalism, responding quickly to my requirements, leading to an eventual withdrawal of the claim against me and my son. I am extremely grateful.

A client who approached us just two weeks before the trial of a large director disqualification claim against him and his son

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