Investigation and disqualification of former directors of dissolved companies
The Insolvency Service regularly receives complaints about the conduct of former directors of companies which have been dissolved, i.e. companies which have ceased to exist as registered companies through being struck off the register. In most cases those complaints concern one of the following areas:
Allowing or causing a company to be dissolved, effectively shedding its liabilities, with a new company continuing its business. Some complaints relate to this happening multiple times, and this is sometimes known as "phoenixism";
Use of the company dissolution process to avoid the cost and implications of formal liquidation proceedings (the process by which a liquidator is appointed, who realises the company’s assets and distributes them fairly to creditors); or
Avoidance of investigation of conduct under the Company Directors Disqualification Act 1986 (CDDA86).
	Similar complaints have been received by the Insolvency Service in Northern Ireland, from creditors of companies which have been dissolved.
	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.
	Following an investigation of the conduct of directors, the Secretary of State may apply to the court for an order for their disqualification. The primary role of disqualification is to protect the business community and members of the public from individuals who have demonstrated that they are unfit to be concerned in the management of a limited company. It also acts as a deterrent to directors abusing the privileges of limited liability. In this respect, extending the disqualification regime to directors of dissolved companies will discourage the use of the dissolution process as a method of fraudulently avoiding repayment of Government-backed loans given to businesses to support them during the coronavirus pandemic, such as loans made under the Bounce Back Loans Scheme.
	The conduct of a company director may currently be considered by the Secretary of State or the Department through information obtained using the power to investigate live companies contained in the Companies Act 1985 (CA85) and the power to investigate the conduct of directors of insolvent companies under the CDDA86 or the Company Directors Disqualification (Northern Ireland) Order 2002 (CDD(NI)O02).
	In both situations, if the investigation determines that there is evidence that the director’s conduct has fallen below the expected standards of probity and competence which are appropriate for persons fit to be directors of companies, and public interest criteria are met, then an application may be made to the court by the Secretary of State, or as the case may be, the Department, for a disqualification order to be made against them. Such an application would either be made under section 8 of the CDDA86 in the case of a live company, under section 6 in the case of an insolvent company, or in Northern Ireland Articles 11 and 9 of the CDD(NI)O02 respectively.
	Investigations are usually triggered by receipt of a complaint, or in the case of an insolvent company, by a report on the conduct of the director submitted to the Secretary of State or the Department by an insolvency practitioner appointed to manage the affairs of an insolvent company (often referred to as the office-holder), in accordance with a requirement under section 7A of the CDDA86 or Article 10A of the CDD(NI)O02. Live company investigations under the provisions of CA85 are undertaken by the Insolvency Service on behalf of the Secretary of State. Insolvent company investigations are undertaken by the Insolvency Service in Great Britain and Northern Ireland, on behalf of the Secretary of State or the Department respectively.
	Complaints about the operation or activities of a live company may be made to the Insolvency Service, whether in Great Britain or Northern Ireland, by members of the public. Those complaints are considered and reviewed in order to determine whether an investigation under CA85 is appropriate and in the public interest.
	Under the law as it currently stands, however, if a complaint is received about a dissolved company it is not possible to investigate any further without taking steps to have the company restored to the register of companies, a process which is complex, time consuming, and would be at the cost of the public purse.
	Complaints regarding dissolved companies often relate to new companies, frequently started very soon after the previous company was dissolved, taking over the dissolved companies’ business, using the same assets (such as location or vehicles), with the same individuals acting as directors. This can be evidence of what is often referred to as "phoenixism", where a company ceases trading leaving its creditors unpaid, and a new company takes over the business without its outstanding liabilities. Evidence points to a low-level but recurring theme of the dissolution process being used to shed liabilities, allowing a new company to take over the business without the burden of its previous debt. The debts avoided in this way often include tax and civil penalties, liabilities to consumers, or employment tribunal awards.
	Other common complaints about dissolved companies are that the dissolution process has been used as a way of avoiding having to put the company into formal insolvency proceedings, with the associated costs and scrutiny that that entails, or that it is used as a way of avoiding investigation of the actions of the directors under the CDDA86 or the CDD(NI)O02.
	The Act will allow the Secretary of State, the Department, or the official receiver, to investigate the conduct of former directors of dissolved companies, without it being necessary to first restore the company to the register. It will not be necessary for the dissolved company to have been subject to insolvency proceedings in order for the power to investigate to apply.
	The proposal to create this new investigative power was included in the Insolvency and Corporate Governance consultation, which ran between March and June 2018. The Government’s response to the consultation, which was published in August 2018, and is available online 3 , noted that the majority of respondents had been supportive of the proposal to widen existing powers to investigate the conduct of former directors of dissolved companies, and where appropriate to take action against them. The response also noted that whilst the dissolution process is an important part of maintaining the integrity of the register of companies, it should not be used as an alternative to formal insolvency proceedings.
	The new powers will have retrospective effect. This will mean that the conduct of former directors of dissolved companies that took place prior to commencement of the measure may be investigated, and where appropriate disqualification action may be taken with regard to that conduct.
	Former directors of dissolved companies against whom disqualification proceedings are taken will have the opportunity to offer disqualification undertakings to the Secretary of State, or as the case may be, the Department, as is currently the case for directors of insolvent companies.
	Where an application for a disqualification order is made to the court in respect of a former director of a dissolved company, the court will have a duty to make such an order if it is satisfied that the person has been a director, and that their conduct makes them unfit to be concerned in the management of a company. This mirrors the current position where such an application is made in respect of the director of an insolvent company.
	A disqualification order made against a former director of a dissolved company, or a disqualification undertaking given by such a person, will be for a minimum period of 2 years and a maximum period of 15 years. This will mirror the periods currently prescribed where orders are made or undertakings accepted in the case of directors of insolvent companies.
	Sections 8ZA and 8ZB of the CDDA86 (and Articles 11A and 11B of the CDD(NI)O02), which allows a period of disqualification to be sought where a disqualified director of an insolvent company was subject to the influence of another person, or was accustomed to acting under the instructions of another person, will be extended to include disqualified former directors of dissolved companies.
	A disqualification order (or an undertaking which has been accepted by the Secretary of State or the Department) prohibits the subject from acting in the promotion, formation, or management of a company for the period of the order or undertaking, without the leave of the court. Breach of such an order or undertaking is a criminal offence under section 13 CDDA86 and Article 18 CDD(NI)O02.
	The existing provisions contained in section 15A of the CDDA86, and Article 19A CDD(NI)O02, which allow the Secretary of State or the Department to seek compensation from directors subject to disqualification orders or undertakings where their actions can be shown to have caused loss to creditors of insolvent companies, will be extended to include former directors of dissolved companies, and will be expanded to include creditors of those companies. This will have retrospective effect, so that conduct which was considered in the disqualification proceedings and which took place prior to commencement of the measure can be considered for compensation.