As lockdown continues to ease across the UK, with the OBR forecasting growth of 4% this year (and a whopping 7.3% in 2022), the Government’s attention is increasingly turning from preserving businesses with state-backed emergency loans to investigating and prosecuting directors whose businesses have taken such loans potentially for self-interest or not to save the business, and then which have been subsequently dissolved (perceived as an attempt to avoid the repayment obligations). With the lower value of bounce-back loans and the non-repayment terms of grants (although grants falsely obtained may still fall into the same category) the economic argument for restoring the company and then pursuing the director (potentially via liquidation) fails.
This follows on from the Budget announcement earlier this year wherein £100 million has been set aside for the creation of a taskforce to tackle fraud within the Furlough and Self Employment Income Support Schemes alone.
To that end, there is currently the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill before Parliament (1st reading 12 May 2021) which, if passed, will grant the Secretary of State acting via the Insolvency Service (the executive agency responsible for investigating and disqualifying or prosecuting directors deemed to be ‘unfit’ to hold directorship) the extended powers to seek a disqualification order against directors as follows:
- it will extend the scope of section 6 of the existing Company Directors Disqualification Act 1986 (“the Act”) (which concerns directors of insolvent companies) to include former directors of companies dissolved without becoming insolvent. If the court is satisfied on an application that the respondent was a former director of a company dissolved without becoming insolvent, and their conduct as a director of that company is determined to fall short of the acceptable standard, the court is obliged to make the disqualification order
- this extension (carving out the condition that the company which such misconduct refers to) applies to any dissolved company, which could theoretically include solvent companies (wound up as a members voluntary liquidation or not) which have then been dissolved (potentially for legitimate reasons, although the misconduct complained of may undermine this perspective)
- retrospectively investigate, prosecute and disqualify directors of companies already dissolved before the commencement of the Act to be passed. This power is tempered by the prevailing limitation under section7(2) CDDA which prevents the Secretary of State/Insolvency Service from making an application for disqualification order 3 years after the relevant company was dissolved, although it will certainly cover any misconduct occurring during the Covid-19 pandemic period (when the risk of fraud perpetrated as a result of government loans and grants was most prevalent)
- there is uncertainty (as of writing) as to when the date of dissolution is deemed – is it the deemed date of dissolution or the expiry of the three month notice period after which the Registrar of Companies strikes the company from the register? No doubt the second reading will consider this
- extends the scope of section 15A of the Act to empower the Insolvency Service to apply for, and for the courts to make, a compensation order against a former director of a dissolved company in circumstances where their conduct causes loss to creditors
It is this last provision that appears most potent – where there is no economic case or no one will to seek a restoration of the company for the purpose of winding-up (a procedure which already exists but which is rarely used, especially where banks’ liability is guaranteed by central government) then a compensation order can be sought to cure the loss to HMRC.
Quite plainly these proposed amendments are designed to discourage directors from dissolving companies in order to avoid investigation and disqualification, particularly where significant state-backed loans have been taken and remain outstanding.
However, it remains the case that a lot of this may have already occurred and therefore there is a dual benefit to providing a compensation possibility, although all creditors (if there are any others, which may be unlikely in the current circumstances) will not benefit.
Given the unprecedented amount of loans granted by the government unseen since the end of the Second World War, we expect the Insolvency Service, and ultimately the Courts, to take these cases very seriously. The consequences will extend not only to a disqualification from holding directorship for up to 15 years, but also the potential risk of bearing personal liability for the loss.
If you are a director of a company that has taken any government-funded loan and are considering dissolution, or have already dissolved it, contact our Directors Services Team.