A new bill, set to pass into law early next year, could have landmark implications for creditors chasing dissolved company debtors. Peter Worrall, associate solicitor at Moore Barlow, explains why the Ratings (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill is one to watch for credit managers.
Under current UK law, former company directors of dissolved companies cannot be investigated by the Insolvency Service under the Company Director’s Disqualification Act (CDDA). This means that in cases where a director has wanted to avoid debt repayments, they only have to dissolve their company and file for a new one with Companies House.
Typically, the dissolution of a company is a straightforward and low cost process. The owner of the business simply has to file a form with Companies House stating they wish to dissolve their company and pay a fee. Unfortunately, due to the simplicity and speed of the process, it has regularly been abused by unscrupulous debtors.
What's changing?
So-called “phoenixism”, where one business dissolves and another takes its place, has frequently left creditors with little hopes of recouping money owed to them. The Ratings and Directors Disqualification Bill aims to close this loophole for good.
It will allow the Insolvency Service to investigate the conduct of directors of dissolved companies and bring disqualifications proceedings against them under the Company Directors Disqualification Act (CDDA) 1986.
If the Bill passes, it will mean that courts can disqualify directors of dissolved companies if they are found to be unfit for management. The length of the ban can be set from 2 to 15 years. Alongside this they will also be required to repay any and all of their creditors.
Breach of a director’s disqualification order can also mean up to two years in prison and/or significant fines to be paid.
The Bill’s explanatory notes raise three complaints against directors of now dissolved businesses. Amongst them are phoenixism, but also dissolving businesses to avoid the costs and implications of a formal insolvency process and the avoidance of investigation under the CDDA entirely.
Why now?
One of the main motivations for the introduction of this Bill is that the UK government harbours some concern that company directors who took out Government-backed support loans during the COVID-19 pandemic may now rush to dissolve their companies rather than repay the loan, causing massive losses to the taxpayer.
As a further contingency measure and acknowledgement of longstanding issues, the Bill will be implemented with retrospective effect meaning that that any directors who pre-emptively dissolve their companies now won’t escape the purview of the Insolvency Service.
The change will be an important moment for creditors, who will have one of the biggest barriers to collecting their debts removed.
Creditors and credit managers should pay close attention to the Bill’s progress through parliament and start thinking now about how they can leverage it.
To learn more about these changes, and what businesses can do to recover debts owed to them, contact peter.worrall@moorebarlow.com.
