New legal risks for directors of dissolved companies

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (the Bill) will possibly become law by late 2021 or early 2022. What are the implications?

The second part of the Bill, which seeks to amend the current law and hold directors of dissolved companies accountable for unfit conduct and The Insolvency Service will be able to :

  • investigate the conduct of directors of dissolved companies and;
  • bring disqualification proceedings against directors under the Company Directors Disqualification Act (CDDA) 1986.

Current status – when can a director be disqualified?

Under the Company Directors Disqualification Act 1986, all directors must meet various responsibilities in relation to their company. Where a director fails to meet such duties, this may amount to unfit conduct, which can result from:

  • trading while insolvent;
  • not keeping proper company account records;
  • not sending accounts and returns to Companies House;
  • not paying tax owed by the company;
  • using company money or assets for personal benefit; and
  • fraudulent behaviour.

The Insolvency Service will investigate a company, or the directors of a company, if it is involved in insolvency proceedings or if there has been a complaint of unfit conduct. Where any wrongdoing or malpractice is found, directors can receive a disqualification order, which can include a ban of up to 15 years. A person who has a disqualification order made against them cannot then act as a director of any UK registered company or overseas company with connections to the UK, or form, market or run a company.

At present, a person may only be disqualified from their position as a director on grounds of their conduct if a company is still active or in the process of entering a form of insolvency. The conduct of former directors of dissolved companies cannot be investigated by the Insolvency Service without first restoring the company to the register of companies, which is time consuming and costly, and involves court proceedings. 

Why is the old law being changed?

The  law is being changed to enable the disqualification of directors, even when the company has already been dissolved, prompted by concerns that the dissolution process is being used as a method of fraudulently avoiding repayment of Government-backed loans given to businesses to support them during the Coronavirus pandemic.

Directors intending to dissolve their companies will now need to consider whether they could justify their conduct if scrutinised by the Insolvency Service.

Now more than ever, it is crucial that directors are aware of their duties, especially where the company is or may become insolvent. Advice must be obtained prior to initiating a company dissolution to ensure that directors are not falling foul of their obligations in doing so, resulting in potential future disqualification and financial penalties.

For further advice on directors duties and company winding up and/or dissolution, please contact the Corporate and Commercial team at Axiom DWFM.

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