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Directors of Dissolved Companies and COVID Fraud

On 12 May 2021, The Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Bill was introduced to Parliament.

The Bill passed through the Commons stages unaltered and recently passed the Committee stage at the House of Lords on 10 November 2021. The Report stage will be taking place on 1 December 2021.

Purpose of the Bill

If the Bill passes all stages and becomes law, it will amend several sections of the Company Directors Disqualification Act 1986 (“CDDA”) allowing the secretary of state to investigate the conduct of former directors of dissolved companies. If the results of such an investigation warrant it, the secretary of state will be entitled to apply to court for the former director to be disqualified and, if the director’s conduct has led to creditors of the dissolved company suffering a loss, to also seek compensation.

This would assist in closing the current loophole where directors dissolve a company rather than liquidate it, thereby avoiding investigation under CDDA. It would also bring an end to the current time-consuming and costly process of applying to court for a dissolved company to be restored to the register, in order for the former directors to be investigated and subsequently disqualified.   For further detail on the legislation, see our previous blog here.

Combatting Bounce Back Loan Fraud

We have already seen the Insolvency Service take action against directors who fraudulently applied for monies under the Bounce Back Loan Scheme (BBLS) during the pandemic. Most recently, a director who fraudulently obtained £150,000 from the BBLS signed an undertaking that banned him from acting as a director for 13 years.

Prior to that the Insolvency Service reported how it had pursued several rogue directors who committed BBLS fraud, including a director of a cleaning company who signed a 9 year disqualification undertaking after an investigation found he had committed BBLS fraud.

This Bill, once enacted, will give the Insolvency Service the ability to tackle instances of COVID fraud more readily, with dissolution no longer being a barrier to disqualification.

The Bill is intended to have a retrospective effect, allowing an application for a disqualification order up to three years after a company has been dissolved. This has the benefit of enabling both the Secretary of State and the Insolvency Service to pursue directors who inappropriately applied for or misused BBLS.

If the Bill is enacted (and there is no reason to think it won’t be) directors who thought that dissolving a company in an attempt to avoid the consequences of any director misconduct, should be prepared for the Insolvency Service to take action, which they have already demonstrated they have an appetite for.

© Copyright 2022 Squire Patton Boggs (US) LLPNational Law Review, Volume XI, Number 322
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About this Author

Associate

Laura Will is an associate in the firm’s Restructuring & Insolvency team, based in our Birmingham office.

+44 121 222 3707
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