Director disqualification in respect of dissolved companies is not a new principle (in fact the key piece of legislation has been in force since 1986), but in 2022 there is certainly a greater risk of it arising as a result of the enactment of new legislation, the Rating (Coronavirus) and Director Disqualification (Dissolved Companies) Act 2021 (the Act).
The new act means that both directors and former directors of solvent companies that were dissolved are now at risk of disqualification. Previous legislation only covered insolvent companies.
This article summarises where this risk may arise, but if anything is learned, it is that directors should: (i) seek advice from a solicitor and an insolvency practitioner before proceeding with any insolvency procedure; and (ii) seek advice to ensure compliance with their directors’ duties at all times.
When did director disqualification previously arise in relation to dissolved companies?
Previously, courts would be under a duty to disqualify directors or former directors of an “insolvent” company where their conduct in respect of the company prior to its dissolution makes them unfit to be concerned with company management in the future.
This was a relatively wide scope for disqualification orders, but it solely related to companies that were legally insolvent. This is no longer the case.
The courts do not have discretion as to whether a director or former director will be disqualified. If a director or former director is deemed as unfit for company management by the court, it will be duty bound to make a disqualification order.
What is the impact of the Act?
There are strict legal tests in place to determine whether a company is actually “insolvent”. The nature of these tests are beyond the scope of this article, but there have historically been a number of instances where companies have been dissolved without actually being insolvent.
To prevent directors avoiding scrutiny, the Act now states that the actions of directors and former directors may be subject to disqualification orders where a solvent company has been dissolved.
The Act has retrospective effect, so although it came into force on 15 February 2022, it covers companies that were dissolved in the past. However, there are certain limitations in that there is a requirement for the application for disqualification to be made within three years of a company being dissolved. Consequently, any director or former director of a solvent company that was dissolved in the last three years should seek legal advice.
What is the impact of director disqualification?
A director disqualification will prevent an individual from being involved in the promotion, formation or management of a company. However, the disqualified director will still be able to be involved with a business in a non-directorial capacity. A disqualified director should always take legal advice prior to engaging in a new venture.
Edward Beedham specialises in the legal and procedural aspects of corporate insolvency, including when there is a concern of director actions in insolvency. If you require advice on corporate insolvency, please contact Edward Beedham at edward.beedham@herrington-carmichael.com or on 01276 686 222.
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