New directors disqualification bill targets directors of dissolved companies

Historically, a person could only be disqualified from being a director on the grounds of their conduct if they were running a functioning company.

If that company had previously been dissolved, it would first have to be restored to the Companies Register before the Insolvency Service could investigate the director's conduct. After their investigations had been concluded, the company would then be dissolved once again.

This is clearly an arduous and time-consuming barrier to investigating directors who may well be wildly unsuitable for directorships. The bill seeks to do away with this requirement by amending the Company Directors Disqualification Act 1986.

The government has announced that the reason for this overhaul is threefold:

1. To stop companies from being dissolved as an attempt to avoid investigation into the directors.
   
    
2. To stop companies from being dissolved in order to rid themselves of their liabilities and the directors creating a phoenix company to rise from the ashes.
   
    
3. To avoid directors using the company dissolution process to avoid formal insolvency proceedings in an effort to reduce the scrutiny placed upon themselves – and the cost of the insolvency proceedings.

However, this bill does not change the fact that a director can only be investigated if an interested party (more often than not a creditor) raises concerns about the company's directors to the Insolvency Service.

This is further compounded by the fact that dissolved companies do not have an external person with a duty to investigate the directors and report them to the Insolvency Service if they suspect wrongdoing, unlike companies on the register with administrators or insolvency practitioners filling this role.

The retroactive nature of the bill ensures that companies and their directors which have already been dissolved will be subject to the same level of scrutiny as companies dissolved in the future.

There were 170,000 company dissolutions in the first quarter of 2021 alone. However, this is still time-barred by the Company Directors Disqualification Act 1986, which states that an application for a director's disqualification must be made within three years of the company in question entering insolvency proceedings unless otherwise directed by the court.

But this bill does go a long way to enforcing the government's mandate that dissolving a company is not a viable alternative to formal insolvency proceedings without restricting legitimate use of the dissolution procedure. 

If you are a company director and unsure which option is right for you, please get in touch with our corporate and commercial team.

SO Legal has solicitors in London, Brighton and East Sussex, and we work with clients across the UK.