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Directors beware! The pitfalls of post pandemic company dissolution

View profile for Julie Hunter
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On 15 December 2021 The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 gained royal assent. Under this new legislation, directors of dissolved companies which received financial assistance during the pandemic face disqualification and orders to pay compensation, if fraudulent behaviour was committed before the dissolution.

This Act will, largely, come into force on 22 February 2022 but it will have retrospective effect and so is of interest to any former director who dissolved their company when a formal liquidation process should have been used, and where financial assistance was obtained but not applied for the purposes for which it was paid.

In October 2021 the financial and other relief measures temporarily granted to companies, and their directors, began to be phased out, but at the same time both the Government and the Insolvency Service began to address the wrongful activity of some directors, whether innocently or otherwise, regarding the use of the funds received, particularly where the company was later dissolved.

Dissolution is a means of bringing a company to an end without first going through a formal solvent or insolvent liquidation process. In effect it will mean that the normal investigations, which take place on liquidation, regarding the distribution of profits, assets and payments to directors from company funds will not take place. Instead the company is dissolved without further enquiry into its financial circumstances.

There have been a number of high profile cases where directors had claimed bounce back loans and then wrongly transferred the money out of the company before dissolving it. There were other cases where bounce back loans were obtained fraudulently, based on false or misleading information. The Insolvency Service has begun, and will continue, to investigate these cases and commence director’s disqualification proceedings against offending directors.

As the extent of the abuse of the financial relief measures became clear, the Government introduced additional measures to give the Insolvency Service more power to investigate, and if appropriate, take action to disqualify wayward directors and also to discourage the continuation of the practice, by giving the court power to order the directors to pay compensation to the unpaid creditors of the company.

The new legislation will come into force in the main, in February 2022 but will be applied retrospectively, giving the Insolvency Service the power to look into the activity of all companies which received financial assistance during the pandemic and then dissolved. Directors of these companies will face investigation and action could be taken to disqualify them from being a director of any limited company in the future.

In addition, the Insolvency Service will have the right to ask the court to order directors to personally pay compensation to creditors of their former company.

Any former or current director of a company considering dissolution or liquidation would be well advised to take advice on their personal legal position, as well as that of the company, before taking any steps to close a company.

The insolvency specialists in Stephensons' commercial law team are available to advise and assist directors and their companies on the impact and effect of this new legislation. Contact us on 0161 696 6170.