New Powers for the Insolvency Service to Investigate Directors of Dissolved Companies

The process for dissolving a company had significant potential for misuse with the powers of investigation and disqualification under the Company Directors Disqualification Act 1986 not applying to directors of dissolved companies. This resulted in a costly and time-consuming procedure that the government had to follow in order to investigate the conduct of a director of a dissolved company.

However, on 15 December 2021, the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 came into force and the Insolvency Service's powers have now been extended to investigate and disqualify directors who have dissolved companies to avoid paying their liabilities, including evading repaying government backed loans to support businesses during the coronavirus pandemic. This new legislation effectively closes the loophole in the Company Directors Disqualification Act 1986 which limited the Insolvency Service's powers to disqualify directors to directors of live companies or those in an insolvency process such as liquidation or administration.

What does this mean for directors? The new legislation means that the Insolvency Service is no longer limited to investigating directors of companies that have entered a formal insolvency procedure. The change is also retrospective and so directors of companies dissolved in the past may still be investigated.The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 has come about in response to the government's commitment to combat those taking advantage of government support during the pandemic, including furlough and bounce back loans as announced in the 2021 budget.According to figures from the National Audit Office, around £17 billion of the £47 billion of bounce back loans is estimated to be unpaid and around £4.9 billion is estimated to have been obtained fraudulently.The consequences of misconduct being found include disqualification as a director for up to 15 years and, in serious cases, prosecution. Additionally, the Secretary of State for Business, Energy and Industrial Strategy has the ability to apply to the court for an order requiring a disqualified director of a dissolved company to pay compensation to creditors who have lost out due to the director's fraudulent behaviour.As a result, directors of companies experiencing financial difficulty are urged to seek legal advice as to the options available in light of the new legislation.If you have any questions in relation to this new legislation, you can get in contact with the Commercial Dispute Resolution team at Freeths by emailing jade.flint@freeths.co.uk.