Changes to the insolvency and director disqualification regime - what will these mean for charity trustees?

Posted: 20/09/2021

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill (the Bill) has received its first and second readings in the House of Commons and is expected to come into law later this year. But what is this Bill and what does it mean for charities?

The Bill introduces important changes to the insolvency and director disqualification regime in England and Wales and will have implications for incorporated charities including charitable companies and charitable incorporated organisations (CIOs), as well as any trading subsidiaries that your charity may have.

The current regime

The Bill is aimed at amending certain sections of the Company Directors Disqualification Act 1986 (CDDA) and gives the Insolvency Service the power to investigate the conduct of directors (or trustees in the case of CIOs), including former directors and trustees of a dissolved company or CIO.

While the Charity Commission has powers to remove trustees or prevent an individual from acting as a trustee, the Insolvency Service’s powers are separate to this. If an individual is disqualified as a director under the CDDA, regardless of whether this is in relation to a charitable company or a commercial company, that individual is unable to act as a trustee of any charity during the period of disqualification without the permission of the Charity Commission or the court.

We have seen how the CDDA operates in the context of charities with high profile cases such as Kids Company (see our previous article on this here), the Public Safety Charitable Trust and Lifeline Projects.

Under the current director disqualification regime, trustees or directors do not face any investigation or questions of accountability when opting to voluntarily wind up their companies or CIOs through the voluntary dissolution procedure. The Insolvency Service only has powers to investigate directors and trustees of live organisations or those entering a form of insolvency such as liquidation or administration. The only way for the Insolvency Service to investigate the conduct of a former director or trustee is to apply to the court to restore the company or CIO and this can be costly as well as time sensitive.

The changes

The Bill proposes to change the current regime and to permit the Insolvency Service to investigate voluntary dissolutions in the same way as a formal insolvency process. If the Bill is implemented, there would also be no need to restore the company or CIO before an investigation could take place.

The aim of this change is to combat public concerns about the abuse of limited liability and the voluntary dissolution process as well as responding to a 2018 Government consultation on corporate governance and reform. Specifically, there are concerns that directors can opt to dissolve a company along with all its liabilities and then proceed to set up a new company which carries on the same business but without those liabilities.

Furthermore, the Bill backs the Government’s promise to combat Covid-19 fraud and prevent companies from using the voluntary dissolution process to avoid paying back loans provided under the Coronavirus Bounce Back Loans Scheme (CBBLS).

If implemented, the Bill would apply retrospectively, meaning that it could apply to organisations which have been dissolved prior to the legislation coming into force.

What does this mean for directors and trustees?

If the Bill is implemented, directors or trustees could now be investigated when using the voluntary dissolution procedure. This could have serious consequences for directors or trustees if any mismanagement had been uncovered following an investigation. If directors or trustees were subsequently barred from being a director or trustee, this disqualification could last for up to 15 years.

Furthermore, a director or trustee could be ordered to pay compensation if their actions can be shown to have caused a loss to creditors. Charities may also have reputational issues if any wrongdoing is found or if a director or trustee is disqualified.

If your organisation is considering using the voluntary procedure to wind up a charitable company, CIO or trading company then advice should be sought on the implications of this. It is imperative that directors and trustees continue to be mindful of and consider their duties, particularly if the organisation is at risk of insolvency or is indeed insolvent.

This approach is especially pertinent when looking at the activities of trading subsidiaries. We often advise clients on the key considerations and necessary legal steps when considering winding up trading subsidiaries that have ceased trading.

It is also worth reminding directors and trustees that these considerations are relevant for any other directorships or trustee roles they may hold.

If you have any questions about how the regime may affect your organisation, require further advice on trustees or directors’ duties, or are considering winding up your charity or another group member, please do get in touch with our team for further guidance.

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