Catch Me If You Can – New Rules Impact Directors Considering Dissolution

Once in a while in life, you will come across a ‘chancer’. In fact it is highly likely that you will personally know, as Google describes, “a person who exploits any opportunity to further their own ends”. However, if this opportunity has a detrimental effect on another individual or breaks the law, there may be a more fundamental issue.

This is the case for a small proportion of businesses and rogue directors but with recent changes to the law around the dissolution of companies, it may give these businesses and individuals pause for thought.

Background

In 2021, about 50,000 companies a month were dissolved from the Company Register. Typically, around half of these are voluntary, i.e. undertaken by the directors of a company, and half compulsory by the Registrar of Companies, when a company fails to file annual returns or accounts on time.

There are many reasons why directors may choose to dissolve a company, the most common legitimate reason is that the company is dormant and no longer required for the purposes for which it was incorporated. In some less legitimate cases it is to hide the conduct of the directors.

“People only know what you tell them.” — Frank Abagnale Jr.

This quote is taken from the Hollywood blockbuster, starring Leonardo DiCaprio and Tom Hanks, Catch Me If You Can. The film is based on the autobiography of Frank Abagnale Jr., who allegedly, before his 19th birthday, successfully performed cons worth millions of dollars by posing as a Pan American World Airways pilot, a doctor, and a parish prosecutor. Whilst the truth of some aspects of his story is questionable, some individuals will go to great lengths to bend the rules for financial gain.

The government has long intended to create new law closing the perceived loophole that allows directors of insolvent companies to quietly dissolve their companies, whilst avoiding the investigations undertaken in insolvency procedures.

Directors dissolution

The significant sums lent to limited companies (and underwritten by the government) under the Bounce Back Loan Scheme and similar schemes has provided the impetus for the government to act. Not least as there was concern that many companies will fail to repay Bounce Back Loans and the directors will then seek to dissolve their companies without any oversight of their actions, especially where fraudulent activity may be involved.

With the introduction of The Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, which received Royal Assent on 15th December 2021, changes have now been made that allow the Insolvency Service to investigate the conduct of directors of dissolved companies, bring disqualification proceedings and seek compensation orders on behalf of the Secretary of State. As such, bringing the powers in line with those found for most formal insolvency procedures, such as liquidation.

Bounce Back Loans

Whilst not specifically referred to in legislation, it is understood that the Department for Business, Energy and Industrial Strategy (“DBEIS”) will object to the dissolution of any company with a Bounce Back Loan outstanding, and we have seen this in practice on a recent matter where we are now assisting a director with the liquidation of a company.

An application to dissolve a company, is therefore, unlikely to succeed where a Bounce Back Loan is outstanding. It is worth noting that HMRC also monitor dissolution applications and will object where debt is outstanding.

“An honest man has nothing to fear, so I’m trying my best not to be afraid.” — Frank Abagnale Jr.

Determining unfit conduct – dissolution now ranks alongside insolvency procedures in respect of investigating director conduct. Therefore, the types of conduct that may typically be considered are the same as applicable insolvency procedures:

  1. fraudulent trading
  2. continuing to trade to the disadvantage of creditors at a time when the company was insolvent
  3. conduct that deliberately removes assets that should have been available to pay creditors
  4. failing to ensure the company is run properly
  5. not keeping or producing appropriate accounting records
  6. not preparing or filing accounts or annual returns at Companies House and/or not submitting tax returns or paying tax and any other money due to the Crown

Accordingly, if a director has not done all they can to mitigate the position for creditors, particularly following knowledge of the company’s insolvency, they may be at risk of disqualification.

If a director disqualification is achieved this can also lead to a compensation order against the director(s).

It is also worth noting that dissolution does not stop a creditor from restoring a company to the register for the purposes of pursuing a claim or where assets could be recovered via an insolvency procedure.

As such, where a company is insolvent, it is recommended that directors speak to an insolvency practitioner to discuss the options available and get the right advice for the best way to proceed.

By Andrew Rumsey (Client Director at Portland Leonard Curtis)

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