Directors beware: disqualification regime extended

The changes to the director disqualification regime brought by the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 (the "Act") come into effect on 15 February 2022. We discuss the extension of disqualification proceedings and the impact on directors here.

The Changes

The Act extends the powers of the Insolvency Service to investigate the conduct of directors of dissolved companies and, where the public interest criteria are satisfied, to raise disqualification proceedings against them under the Company Directors Disqualification Act 1986 ("CDDA 1986").

Prior to the Act, the Insolvency Service was only empowered to investigate the conduct of directors of live companies (i.e. companies which are on the Register of Companies, held at Companies House). Where a company had been dissolved, the Insolvency Service had to restore the company to the register before acting. Since administrative restoration is only available to former directors and members of a dissolved company, this would involve the Insolvency Service raising court proceedings to restore the company. This process was time consuming and added additional cost, which the Act is designed to remedy.

The Act is retrospective, meaning the Insolvency Service can investigate (and pursue) directors of companies which were dissolved prior to its commencement. Disqualification proceedings can be raised up to 3 years after the company has been dissolved.

The changes extend to the Insolvency Service's ability to apply for compensation orders. Compensation orders aim to make directors financially accountable for the consequences of their unfit conduct. The Act means that compensation orders can now be sought against former directors of dissolved companies if their unfit conduct has caused loss to the company's creditors.

Policy Background

The intention of the Act is to deter directors from using dissolution as a means to avoid liability - in particular, repaying the Government-backed COVID Bounce Back Loans.

The Act is also to deter directors from using dissolution as a means to avoid the costs and implications of formal insolvency proceedings, including their conduct being investigated under the CDDA 1986.

What does this mean in practice?

We will have to wait to see whether the Act results in a higher volume of disqualification proceedings being brought by the Insolvency Service.

For companies placed into a formal insolvency process (i.e. administration or liquidation), there is a duty on insolvency practitioners to report on the conduct of the directors to the Insolvency Service. It is this report, if unfitness is identified, which will generally trigger an investigation by the Insolvency Service, and any resulting disqualification proceedings. In the context of dissolved companies, the success of the new regime will depend on complaints being raised with the Insolvency Service by creditors or other interested parties.

Disqualification orders range between 2 and 15 years and can have serious reputational consequences, affecting all aspects of a director's life. If faced with potential disqualification or investigation by the Insolvency Service it is important that directors take prompt advice from appropriately experienced professionals.

To discuss any of the issues raised in this article in more detail, please contact your usual Brodies contact or one of the contacts listed below.