In recent years, there has been a growing trend to make the Boards and top-tier management of companies more accountable for their decisions. Directors of dissolved companies can now also be investigated.
Initiatives such as the Senior Managers Regime for the financial sector (2018), and the Government's "Restoring trust in audit and corporate governance consultation" (2021), sought to make the directors more answerable for their firm's internal controls over financial and non-financial reporting.
Under the new Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, the Insolvency Service has retrospective powers to investigate the conduct of directors of dissolved companies.
This Act is intended to address concerns that the previous legislation allowed directors to:
- allow or cause a company to be dissolved, effectively shedding its liabilities, with a new company continuing its business;
- use the company dissolution process to avoid the cost and implications of formal liquidation proceedings; and
- avoid investigation of conduct under the Company Directors Disqualification Act 1986.
The timing of this Act is particularly important following the closure of the Coronavirus Job Retention Scheme ('CJRS') on 30 September 2021. HMRC estimates that around £5.3 billion has been mistakenly or fraudulently accessed under the CJRS. As a result, we expect to see a rise in HMRC CJRS investigations supported by the Taxpayer Protection Taskforce, which launched in March 2021 with a remit of tackling non-compliance across the various Government Coronavirus Support Schemes (as discussed in our earlier article).
The extension of the disqualification regime to directors of dissolved companies will now deter directors from using the dissolution process to avoid repayment of Government-backed loans received during the coronavirus pandemic via CJRS. More widely, the dissolution process ultimately will no longer be an avenue for directors to avoid the consequences of their wrongful conduct.
The changes continue the trend of greater corporate governance burdens being placed on directors. Indeed, under the Finance Act 2020, where a company has claimed funds under the CJRS incorrectly or fraudulently and cannot satisfy its debt to HMRC due to insolvency or potential insolvency, directors may be held jointly and severally liable for that debt.
To minimise the risk of investigation, directors should review their position to mitigate potential liabilities and disqualification in relation to the CJRS by taking early action before an investigation commences.