Disqualification of Directors of Dissolved Companies

In December 2021 legislation came into force that directors of a dissolved company can be subject to investigation, disqualification proceedings and in the most serious of cases, prosecution.

The process of dissolving a company was never intended as a way for directors to avoid the consequences of wrongful conduct. However, an increasing number of claims are being brought against directors that have allegedly done just that, in particular, directors misusing government assistance received during the COVID-19 pandemic.

Previously, if a company was dissolved without going through a formal liquidation process, its directors would not be subject to an investigation into their conduct under the Company Directors Disqualification Act 1986, unless the company was subsequently restored. However, the legislation removed the hurdle of restoring a company to the register.

The legislation intends to not only give pause to directors who may be considering dissolution as a method of avoiding scrutiny, but also, given that the act takes effect retrospectively, provides an avenue for action to be taken against directors that may previously have used dissolution for that purpose.

The Insolvency Service is able to look into the activity of dissolved companies that may have received government backed loans during the pandemic or may have misused company funds. Directors of these companies may face disqualification proceedings, an order to personally compensate creditors and, in the most serious of cases, prosecution.

For creditors who had previously struggled to hold directors to account, this is a welcome step. Creditors are able to report their concerns directly to The Insolvency Service. Absent of a complaint by a creditor (or other interested party), bad behaviour could still pass by unnoticed. However, ‘industry’ has stepped in and a number of solicitors offer services to pursue a director who has misused company funds or government funding.

A number of directors have been disqualified. In many of those cases, a director has secured a bounce back loan before taking steps to dissolve a company, in an attempt to avoid repaying liabilities under the scheme.

A director considering dissolution would be well advised to take advice on both their personal responsibilities and those of a company, particularly in circumstances where a company is insolvent or at risk of insolvency.

How Crowe can help

At Crowe, we have a team of experienced and licensed Insolvency Practitioners who can advise you on the best course of action, depending on your business’s circumstances. Please get in touch with either Steven Edwards or Vince Green who are licensed Insolvency Practitioners, or your usual Crowe contact.