The Insolvency Service has reported the first disqualifications under new legislation introduced to tackle the practice of directors dissolving companies in order to evade debts.
According to the report, a total of four directors have recently entered into disqualification undertakings for periods of disqualification ranging between 7 and 12 years. In each case, the respective companies had obtained bounce back loans (BBLS) and subsequently been dissolved, leaving the BBLS unpaid.
BBLS were part of the range of support made available to businesses following the coronavirus pandemic. The maximum loan available was £50,000. The scheme effectively closed in March 2021. Abuse of BBLS and other schemes has been widely reported.
In December 2021 the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act (Act) became law. The Act extends the Insolvency Service’s powers to seek disqualification orders (or accept disqualifications undertakings) to directors of companies that have been 'dissolved without becoming insolvent'. Becoming insolvent means entering into administration or liquidation.
The Act operates to amend provisions of the existing Company Directors Disqualification Act 1986 (CDDA), which previously applied only to directors of companies that had entered an insolvency process. A company can be dissolved in a number of ways, including via an application by its director(s). Whilst companies that had been dissolved without going into an insolvency process could (in certain circumstances) be restored and then put into an insolvency process, thereby engaging the CDDA, this adds a layer of time and costs.
The Insolvency Service's report adds that it is considering the use of compensation orders, where appropriate, as a means of recovering BBLS funds from directors. Compensation orders were introduced in 2015 and (in short) enable the Insolvency Service to seek an order (in addition to disqualification) that a director pay compensation where their conduct has caused a quantifiable loss to one or more creditors of a company. Any compensation that is awarded can ultimately be distributed to the creditor(s) who suffered loss. The Act similarly extends the ambit of compensation orders to directors of companies that have been dissolved without first entering an insolvency process.
The legal framework prior to the Act arguably left something of a loophole, with directors whose conduct merited investigation seeking to 'bury' a company via dissolution (before the company's creditors could force it into an insolvency process) with a view to avoiding regulatory scrutiny and potential disqualification and personal financial liability. The Act was therefore a very welcome extension of the director disqualification and compensation order regime, and it is encouraging to see the Insolvency Service exercise its powers in relation to BBLS in particular. These powers sit alongside the Insolvency Service's ability to petition for the winding up of live companies on grounds of public interest (as opposed to insolvency), which has also been used recently where COVID-19 support has been abused.