Changes Affecting the Dissolution of a Company
On 15 December 2021, Royal Assent was given to the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021. This brings into effect important changes that may affect directors who plan to or have recently dissolved a company.
This Act is primarily designed to tackle two types of situations:
- Where a company director / directors close down one company and then set up another company which is more or less identical thereby escaping the first company’s liabilities.
- Where a company director has claimed a Government Bounce Back loan and then dissolves the company in order to avoid having to repay the loan.
Dissolution versus Insolvency
Dissolving a company is a very easy way to close a company. It involves little more than signing a form and filing it at Companies House, and then following a fairly straightforward two-month process led by the directors following which the company is formally dissolved. What’s more, directors of a company that has been dissolved, rather than being liquidated following Insolvency proceedings, could not previously be investigated or subject to director disqualification proceedings. To do so, it was necessary to apply to the court to restore the company before any other action could be taken.
The new law and sanctions
The new Act gives the Insolvency Service powers to investigate and potentially disqualify directors of dissolved companies. The Secretary of State can now apply directly to the court for disqualification orders and creditor compensation orders, if the actions of the director, who is to be disqualified, can be shown to have caused a loss to creditors.
These powers are retrospective and an application for a disqualification order can be made up to three years after a company has been dissolved. The disqualification from acting as a company director can be for up to 15 years. Other sanctions include seeking an order to prevent directors of dissolved companies from setting up a near-identical business after the dissolution.
The Act is part of the Government’s push to tackle all forms of abuse arising from the financial support given by the Government during the pandemic.
Whilst at first glance this may seem to be a straightforward approach to tackling abuse of the existing system, this extension of investigative power seems inevitably likely to result in an increase in cases in respect of Directors’ and Officers’ Liability insurance.
Most significantly, however, it means that it is now more important than ever that directors of a company in financial difficulties should take early legal advice in respect of the best action to take, regardless of whether they borrowed by way of the Bounce Back Loan scheme. Simply dissolving the company will not now necessarily mean that directors avoid further investigation.
We urge you to get in touch if you have any concerns regarding the issues raised above.
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