Currently, the power to disqualify directors under the Company Directors Disqualification Act 1986 only applies to a company that has become insolvent. In 2019, 529,680 companies were dissolved and while only certain companies are eligible for dissolution, it is open to abuse given it involves only the director filling in and returning forms for a minimal fee.
It is difficult for the Insolvency Service to investigate and if appropriate, seek to disqualify directors who abuse this because in order to do so, the company has to be restored to the register and the powers of investigation then invoked. This is expensive and less than 35 companies which were dissolved in 2019 were later restored.
For some time, the Government has looked into closing this loophole – the Commons Briefing Paper supporting the bill records this has been driven by a concern directors may be abusing the dissolution procedure to avoid repaying Government backed loans given to them during the pandemic. Between January and March 2021, there were 171,169 company dissolutions in the UK, an increase of 25% compared with the same quarter of 2020.
The Insolvency Service’s response to the wider consultation on Insolvency reforms in 2018 was that misconduct in relation to dissolution is a problem and they estimate there may be some misconduct in 1% of all dissolution. If correct, given 500,000 or so companies are dissolved each year that is a large number of companies falling outside the disqualification current regime.
The bill is unlikely to get much resistance through parliament and may be in force by the end of the year.