New Bill extends directors’ disqualification regime to the directors of dissolved companies

On 12 May 2021, the UK Government introduced the Rating [Coronavirus] & Directors Disqualification [Dissolved Companies] Bill. 

The Bill aims to reduce the time and costs associated with retrospectively investigating the conduct of former directors of dissolved companies. The legislation also seeks to tackle instances where a company has been dissolved so that its directors can avoid an investigation of their conduct, as well as to combat phoenixism, whereby a company is dissolved in order to shed liabilities, only to then incorporate a new company continuing the old company’s business, free of those liabilities.

What is the Rating [Coronavirus] & Directors Disqualification [Dissolved Companies] Bill?

This new piece of legislation contains essentially two modifications to current law: 

Clause 1 of the Bill prolongs the Government’s decision of 24th March 2021 to prevent the impact of COVID-19 restrictions from being considered a factor in the next Revaluation of Business Rates (due in 2023) to include Government-imposed restrictions applying from after 24th March 2021. 

Clauses 2&3 of the Bill empowers The Insolvency Service to investigate retrospectively the conduct of former directors of dissolved companies, even after the company has been liquidated. This is a change from the status quo whereby The Insolvency Service is only able to investigate directors of companies when they apply for liquidation, but not after the process is complete. 

This Bill effectively closes the loophole of limited liability after liquidation and aims to discourage the practice of avoiding repayment of creditor or Government loans, specifically the Coronavirus Bounce Back Loans Scheme. The Government estimates that between 15%-80% of these loans may not have been fully repaid.

Why is Clause 1 necessary?

At each Revaluation of Business Rates, non-material changes of circumstance are considered (e.g. economic factors, market conditions, and variation in general costs of rent) to determine business rates. Between Revaluations, material changes of circumstances (e.g. physical changes to property) are considered in individual applications to challenge local rateable valuations at the next national Revaluation. 

The Bill determines that COVID-19 interventions will be considered a non-material change in circumstances and therefore will only be accounted for in national Revaluations (2023) except for 3 notable exceptions which are considered material changes in circumstance:

• Where COVID-19 interventions affect the physical state of a property.
• Where COVID-19 interventions affect the quantity of minerals extracted (industrial settings).
• Where COVID-19 interventions affect the quantity of wasted disposed from a property.

Thus, any individual application to the Valuation Office Agency citing COVID-19 interventions as a change in circumstance will fail due to this legislation if not including an exception. The purpose of this Bill is to minimise the number of individual reassessments of rateable values pertaining from the impact of COVID-19. 

The Government will instead provide support to ratepayers through a blanket business rates relief.

Why are Clauses 2&3 necessary?

The Government argues that: “It is not currently possible for the conduct of former directors of dissolved companies to be investigated without first restoring the company to the register of companies, which is time-consuming and costly, and involves court proceedings. This measure will allow the Secretary of State (or in Northern Ireland, the Department for the Economy (“the Department”)) to investigate the conduct of former directors of dissolved companies without there being a requirement to first restore the company to the register.”

The Government aims to bypass the current requirements of paying a court fee of £280, £100 to Companies House and additional legal fees to restore the dissolved company to the register of companies. 

Current procedure does not require investigation into the conduct or accountability of directors who choose to voluntarily dissolve using a Form DS01. Debts to creditors are often left unpaid after a process of dissolution due to directors’ limited liability.

How will the Rating [Coronavirus] & Directors Disqualification [Dissolved Companies] Bill be enforced?

Clause 1 will allow the Valuation Office Agency to disregard any application citing COVID-19 interventions as a change of circumstance. Clauses 2&3 will allow the relevant Secretary of State or their Department to investigate the conduct of directors of dissolved companies, both present and retrospective. The power to investigate will apply regardless of whether the dissolved company had been subject to insolvency proceedings.

How will the Bill affect directors?

Directors disqualified after an investigation will be prohibited from occupying any directorship from 2-15 years. Where their actions can be shown to have caused loss to creditors, former directors will be ordered to pay compensation. 

Appropriate advice should be taken prior to instigating any wind-down or dissolution process and directors should be aware of their duties, especially where the company is or may become insolvent.