It is unfortunately a common story for anyone who has been in business for any length of time: the unscrupulous director who, rather than confront creditors in an insolvency process, simply disappears as if by magic by dissolving the company and re-appearing elsewhere moments later, leaving creditors clasping nothing but smoke. This loophole has frustrated creditors for many years as it means their only remaining option is a commercially unattractive application to restore the company to the register in order to petition to place the company into compulsory liquidation. Only then would this trigger the Insolvency Service’s investigatory powers and the ability to scrutinise the conduct of the directors (or the appointment of an insolvency practitioner to do so).
Amid concerns over fraudulent evasion of liabilities linked to the Covid-19 emergency loans, the Government announced on 12 May 2021 (click here to view the full announcement) that it intends to legislate, through the proposed Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill, to give power to the Insolvency Service to investigate these directors. This will come as welcome news to those creditors that have, until now, had to watch on as, in many cases, the usual suspects continue to game the system and pop up elsewhere. Interestingly, it is proposed that these powers will have retrospective effect and perhaps the ultimate threat of a director disqualification order for up to 15 years will curtail this disappearing act.
Practically speaking, two questions arise: what is the point of new powers unless they are deployed and will new legislation be accompanied by investment into the Insolvency Service? Serious concerns are being raised about whether the Insolvency Service has the resources to trace and pursue these vanishing directors at a time where many restructuring experts believe that a tidal wave of corporate insolvencies is approaching shore due to the upcoming relaxation of the restrictions brought in by the Corporate Insolvency and Governance Act (2020). The Insolvency Service, like the court system on which it relies, is overburdened and while it is seeking to deal with as many cases as possible as best it can, delay is inevitable. Rogue directors are using this delay as an opportunity for the disposition of assets to avoid justice if and/or when the Insolvency Service is able to bring it to bear. Only time will tell in relation to these questions.
To creditors concerned about a director getting ready to perform a disappearing act, the proposed reforms are welcome but may be too little too late. Creditors need to act quickly and act now to protect their interests. Equally, a director of a company which is facing financial difficulties will also need to act now to avoid potentially serious repercussions including the possibility of director bans.
Whether creditor or director, Penningtons Manches Cooper’s restructuring and insolvency and commercial dispute resolution teams are on hand to provide expert advice and guidance.