New legislation on director disqualification and phoenix companies

New legislation has been passed that means directors can’t use the dissolution process to avoid investigation into their conduct as a directors. This has been introduced, in part, to combat ‘phoenix companies’ (more on these in a bit).

Previously, once a company had been dissolved, but had not gone through the liquidation process, the directors were safe from examination. 

Now, thanks to The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021, the government can look into the behaviour of a director – even if the company has formerly gone through the dissolution process with Companies House. 

This can result in directors being disqualified from taking on the role again (for up to 15 years) and possibly even criminal prosecution. 

This will be imposed by the Insolvency Service.

Phoenix companies

One of the reasons that the Act has been passed is to discourage ‘phoenix companies’ (also known as phoenixism).

This is when a company can’t pay its debts – and so is insolvent – but rather than go through the necessary steps to close down correctly, the directors arrange the dissolution (typically reserved for companies with no debts or assets) of the company. 

Once closed down, a new company emerges, often with a remarkably similar name, the same personnel, and offering the same service.

This new phoenix company does not take on any of the debts of the old company, and creditors ultimately lose out on what they’re owed.

Coronavirus business loans

The pandemic saw many government-backed loans launched to help businesses stay afloat. 

However, the fear was, that rather than repay the loans, directors were filing for a dissolution, and so closing their companies as part of an effort to relieve themselves from paying back the loan. 

The aim of this new measure is to put an end to this.

Thanks for reading

We hope this blog post has given you an insight into the new legislation and phoenix companies.

If you do have any questions, be sure to leave a comment. And remember to take a look at our central blog page for more posts that may be of interest.