New powers have been given to the Insolvency Service to investigate, disqualify and fine directors who abuse the dissolution procedure.

The UK government has introduced new measures[1] to extend the Insolvency Service’s powers to now investigate and disqualify company directors who seek to abuse the company dissolution process.

With effect from 15 December 2021, the Act is an attempt by the Government to dissuade directors from dissolving companies to avoid repaying Government-backed loans put in place to support businesses during the coronavirus pandemic.

The Insolvency Service’s powers

The Insolvency Service already had the power to investigate directors of companies entering insolvency but it will now also be able to investigate directors of dissolved companies.

Directors of dissolved companies will now also face disqualification proceedings against them where it is believed to be in the public interest. This will apply with retrospective effect, meaning the conduct of directors of dissolved companies that took place prior to the Act’s commencement may be investigated.

What is the punishment?

If misconduct is found, directors can be disqualified for up to 15 years or, in the most serious of cases, face prosecution.

Compensation can also be sought where a director’s conduct has caused a loss to creditors.

Dissolution

A company can be dissolved for different reasons. It might be voluntarily dissolved by its directors when it is not required any more or by Companies House if it believes that the company is not operating.

The context

Over 400,000 companies were dissolved in 2020 to 2021.

It is understood that there has already also been a wave of applications for voluntary dissolutions by borrowers of bounce back loans, which the Government has so far held off by objecting to dissolutions being confirmed at Companies House.

Unfit conduct

The Government’s website lists examples of unfit conduct as:

• fraudulent behaviour;
• not submitting tax returns or paying tax and any other money due to the Crown;
• continuing to trade to the disadvantage of creditors at a time when the company was insolvent;
• conduct that deliberately removes assets that should have been available to pay creditors;
• letting somebody else run the company for the director;
• not making sure the company is run properly;
• not keeping or producing appropriate accounting records;
• not preparing or filing accounts at Companies House;
• not filing annual returns at Companies House;
• not complying with other regulations; and
• not co-operating with any Official Rreceiver or insolvency practitioner appointed to the company.

The Insolvency Service may investigate where information suggests that:

• corporate abuse has occurred. This is usually where the company has been involved in very serious misconduct, fraud, scams or other unethical behaviour;
• a director did not make sure the company met all its statutory obligations, leaving it with unpaid fines or other enforcement action. For example, there might be outstanding fines for breaches of Health and Safety, Immigration or Environmental regulations;
• a director has improperly carried on the same business or traded through a series of companies where each becomes insolvent. Each time this happens, the insolvent company’s business and assets, but not its debts, are transferred to a new, similar “phoenix” company. Depending upon the circumstances, this might show a director is unfit;
• a director has repeatedly traded with the benefits of limited liability without following the rules relating to limited liability companies. For example, the director has a long history of serious filing defaults; and
• a director has not complied with the rules when applying to strike off a company from the Register of Companies.

Entities not covered by the new powers

The Insolvency Service cannot investigate possible unfit conduct in dissolved:

• limited liability partnerships;
• general partnerships;
• building societies;
• incorporated friendly societies;
• NHS foundation trusts;
• registered societies;
• charitable incorporated organisations;
• further education bodies; and
• protected cell companies.

Restoration

If a company has been dissolved, a creditor can apply to the Court to restore the company to the Register of Companies, so that they can take recovery action against it.

Depending on the value of the debt, a creditor may then petition the Court to wind up the company after its restoration. This would start an investigation by the Official Receiver into how the company’s affairs have been conducted and why it failed.

Click for our Guide to the investigation of directors of dissolved companies to print and keep.