THE Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Bill is currently working its way through Parliament. Once enacted, it will extend the disqualified directors regime to the directors of dissolved companies.
At present, directors of insolvent companies can be investigated. If their conduct is considered below the expected standard, the Department of the Economy can apply to court to have that director disqualified, for a specified period of time between two and 15 years, from becoming a director of a company, or directly or indirectly being concerned or taking part in the promotion, formation or management of a company without the leave of the Court.
However, if the company was dissolved, i.e. struck off the Register as opposed to being wound up, at present, the Department of the Economy does not have power to bring a disqualification application.
Rather, for the conduct of such directors to be open to scrutiny, that company must be restored to the Register and then wound up. Those steps are time consuming and add an extra layer of cost to the process. It is therefore considered that there is a loophole in the current regime.
The dissolution process is a quicker and cheaper way of closing down a company than a formal winding up process. Whilst it should only be used in particular circumstances including that the company must not have traded in the last three months, there is considerable scope for the process to be abused.
In particular, by way of a practice commonly called “phoenixism”, directors can dissolve a company, getting rid of all of its liabilities and then go on to set up a new company, often with a similar name and carrying on the same business but without the liabilities.
The aim of the bill is to address public concern about such conduct, at a time when, due to Covid 19 financial support schemes, there is perhaps temptation to take advantage of this loophole. The government has promised to combat Covid fraud and as such the new bill, if enacted, should prevent companies using, or abusing, the dissolution process to avoid paying back loans provided under the Coronavirus Bounce Bank Loans Scheme.
It is proposed that the legislation will apply retrospectively and it is therefore more important than ever for company directors to seek specialist advice and fully understand all implications prior to closing down an unwanted company.
:: Jill Annett (jill.annett@mckees-law.com) is a senior associate in McKees (www.mckees-law.com) specialising in commercial disputes
