On 15 December 2021, the highly anticipated Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 (“the Act”) was passed. The legislation amends the Company Directors Disqualification Act 1986 so that directors of companies which are dissolved are subject to the same investigation and potential disqualification as directors of live or insolvent companies.
The Act is now fully in force and has extended powers of investigation granted to the Secretary of State by the Act are already in force.
Compensation payable by disqualified directors
Director disqualification is only one part of the new powers granted to the Insolvency Service on behalf of the Secretary of State. The real driving force behind the accelerated legislation is the Secretary of State’s power to apply for an order (or agree an undertaking) that a disqualified director pay compensation to the Secretary of State for the benefit of a creditor or class of creditor.
Compensation orders are rarely utilised by the Secretary of State as disqualification proceedings previously only applied to live companies or companies in liquidation, both of which have clear paths to recovery for creditors. However, creditors of a dissolved company must first apply to restore the company then put it into liquidation which is a lengthy and expensive process.
This issue became a little more urgent when an estimated £47 billion was loaned to companies under the ‘Bounce Back Loan’ scheme.
- The National Audit Office reported on 3 December 2021 that an estimated £4.9 billion of the monies loaned had been lost to fraud.
- As the Government has backed these loans, the banks have little motivation to go through the process of chasing down any unpaid loans in companies that have been dissolved.
The expectation is that the Secretary of State will begin seeking compensation orders and disqualification undertakings against/from disqualified directors of dissolved companies in order to obtain repayment of the loans without the Government having to step in as guarantor.
The Act is retrospective and applies to companies dissolved within three years of the Act coming into force. However, the Act does not specify which stage of dissolution is treated as the day the company was dissolved for the purposes of the Act. It seems likely, however, that this will be the date that the company’s name is removed from the official register.
Should directors be worried about the new rules?
It is not yet clear how effective it will be, or how readily the Insolvency Service will use its new powers.
For example, it is not clear how the conduct of directors of dissolved companies will be notified to them in the first place.
- when a company is put into liquidation and a liquidator is appointed, the liquidator has three months to submit a report on the director’s conduct which is then reviewed by the Insolvency Service.
- for live companies, it is often disgruntled customers or suppliers who report to the Insolvency Service.
So how will directors of dissolved companies come to the attention of the Insolvency Service in the first instance? Will the new powers be used by another department for the Secretary of State?
It is likely that the Insolvency Service’s main target will be those companies with unpaid bounce back loans, with a view to tackling directors who have acted fraudulently. However, as is the case with insolvent and live companies, the Insolvency Service may still investigate directors who have not committed any wrongdoing but shall need to ultimately defend their position nonetheless to avoid disqualification.
At Francis Wilks & Jones we have considerable experience of director disqualification proceedings and advising directors on the benefits and risks of entering into a disqualification undertaking either generally or as a component of a strategy to remain a director of your current company.
Interested to read more? Read our guide on director disqualification and bounce back loans.
Please call any member of our director services team for your consultation now for assistance. We can help, whatever your enquiry.
I would strongly recommend using FWJ for director disqualification matters. Tactically and commercially they played it just right and I am now able to get on with my business life without the worry of disqualification hanging over me.A director we defended against a disqualification claim