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Why dissolution doesn’t necessarily fix the problem

It has become a worrying commonality to see rogue directors seeking the position of no liability and disqualification through dissolution of their companies rather than letting it go into Liquidation. Application of dissolution is usually made by a Director or indeed simply not filing returns and letting Companies House strike it off.

 

In many cases displeased creditors would find out about this after the event, leaving them with extreme difficulty in trying to pursue their debt.

 

Given the high levels of fraudulent applications of the bounce back loans, this dissolution process, until recently, has enabled a number of companies to “slip through the net” through the banks themselves missing imminent company strike-offs and an inability to pursue the Directors themselves.

 

Likely with this common scenario in mind, in December 2021 The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) act 2021 received royal assent extending the duty of the court to disqualify unfit directors under s6 of the Companies Disqualification Act to directors of dissolved companies (not just insolvent ones). Breaches of such disqualifications indeed is a criminal offence and can lead to imprisonment, so not to be taken lightly.

 

Following disqualification being made, the court then has the powers to order such director to pay compensations either to the Secretary of State or specified creditors if so applicable.

 

It is intended that this new legislation will discourage the use of dissolution to avoid repayment of such bounce back loans or indeed other creditors.  This should also not sit comfortably for those of already dissolved companies as the provisions, unusually, also carry a retrospective effect.

 

In essence, it may be pragmatic to seek advice in the scenario of inability to pay debts, not take the chances of dissolution.

 

Given the legislation is still new there is little case law on the topic however the following disqualifications provide an indication as to some scenarios that the insolvency have pursued and prosecuted on.

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