This is unfortunately a common story for anyone who has been in business for a long time: the unscrupulous manager who, rather than facing creditors in insolvency proceedings, simply disappears as if by magic by dissolving the company and reappearing away moments later, leaving the creditors hugging nothing but smoke. This loophole has frustrated creditors for many years because it means their only remaining option is a commercially unattractive application to restore the company to the register to seek the company’s forced liquidation. Only then would this trigger the Insolvency Service’s investigative powers and ability to review the conduct of directors (or the appointment of an insolvency practitioner to do so).
Amid concerns over the fraudulent evasion of liability for Covid-19 emergency loans, the government announced on May 12, 2021 (click here to see the full announcement) that it intends to legislate, by through the Proposed Rating (Coronavirus) and Disqualification of Directors (Dissolution Companies) Bill, to empower the Insolvency Service to investigate these directors. This will be good news for creditors who until now have had to watch as, in many cases, the usual suspects continue to game the system and show up elsewhere. Interestingly, these powers are proposed to have retroactive effect and perhaps the ultimate threat of a director disqualification order of up to 15 years will limit this disappearing act.
Concretely, two questions arise: what use are the new powers if they are not deployed and will the new legislation be accompanied by an investment in the Insolvency Service? Serious concerns are being raised about whether the Insolvency Service has the resources to track down and prosecute these missing directors at a time when many restructuring experts believe a tidal wave of corporate insolvencies approaching shore due to the upcoming relaxation of restrictions imposed by the Corporate Insolvency and Governance Act (2020). The Insolvency Service, like the court system on which it relies, is overburdened and, although it tries to process as many cases as best it can, delays are inevitable. Rogue administrators use this delay as an opportunity to dispose of assets to avoid justice if and/or when the insolvency service is able to enforce it. Only time will tell in relation to these questions.
For creditors concerned that a director is about to perform a disappearing act, the proposed reforms are welcome but may be too little too late. Creditors must act quickly and act now to protect their interests. Similarly, a director of a company that faces financial difficulties will also need to act now to avoid potentially serious repercussions, including the possibility of director bans.