Difficult Decisions for Directors – a word of warning!

What the Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill means for directors.

As we emerge from lockdown many company directors have difficult decisions to make. Notwithstanding the dreadful effect the pandemic has had on people’s physical and mental wellbeing, so far, the economic catastrophe predicted by many has not happened.

The measures introduced by the Government have effectively shielded many businesses from the effect of the lockdown.

These measures, including the moratoria on winding up petitions, the furlough scheme, tax and rent deferral and the numerous financial packages have supported many businesses which otherwise would have struggled. But these reinforcements are coming to an end and many directors face the uncertainty of whether they will be able to trade on and repay the accumulated debts, whether the accrued liabilities mean some form of restructure is essential for survival or if they have to address the fact that their business may no longer be viable and must close.

If the company’s financial position has deteriorated to the extent that insolvency appears inevitable then directors must prioritise the interests of creditors over shareholders.

Following the introduction of the Corporate Insolvency and Governance Act 2020, there is now an even greater range of rescue and recovery processes available to attempt to save a viable business but for a company which cannot be salvaged then a formal liquidation may be inevitable.

Whilst in the past the option of doing nothing may have been attractive as the existing legislation allows a director to dissolve their company without facing the scrutiny and investigation of a liquidation. Crucially, the Insolvency Service can only pursue directors of live companies or of those which have entered a formal insolvency process. If a company has been dissolved then the directors can only be investigated if an application is made to restore the company to the register.

Under the Bill, which is expected to become law later this year, the Insolvency Service has the power to investigate the directors of dissolved companies and if appropriate bring disqualification proceedings against them. Importantly, the law, when passed, will have retrospective effect.

Clearly the Government is setting out its intention to pursue directors who attempt to avoid repayment of government-backed funding, such as CBILS or Bounce Back Loans, by dissolving their company instead of placing it into a formal insolvency process.

New powers to tackle unfit directors of dissolved companies – GOV.UK (www.gov.uk)

This proposed legislation emphasises the importance of directors taking legal advice early once they realise their company has financial difficulties and could be insolvent. Doing nothing and hoping that the problem just goes away now carries a significant risk for directors going forward.

Jeremy Gordon can support and advise directors and businesses who may be experiencing financial pressure or where there are concerns about what the future holds. Restructuring and rescue options are available and we are happy to discuss them with you.