Covid and Director Responsibilities – From Protecting the Honest but Nervous Director to Targeting the Dodgy One
In our December 2021 article (found here) we looked at the temporary protection afforded by the government to directors of companies whose viability was threatened by the Covid associated downturn. Many directors of Covid-hit businesses would have toyed with the idea of placing their companies into an insolvency proceeding to protect themselves from the personal liability that comes with an unsuccessful attempt to trade through (and out of) financial difficulties. The government took the view that the public interest would not be served if a raft of businesses affected by lockdown were liquidated prematurely and unnecessarily by nervous directors. The government intervened to steady the nerve of directors by suspending liability for wrongful trading for two periods of time between March 2020 and July 2021.
Having intervened to help out honest (but nervous) directors, the government has now turned its attention to seeking accountability from those less scrupulous directors who benefited from government backed Covid business loans and sought to avoid repayment by dissolving their companies, thereby, in the words of the Business Secretary: “abusing the Covid financial support that has been so vital to businesses”. The government has done this by extending the investigatory powers of the Insolvency Service to include directors of dissolved companies.
Accountability of Directors
The Insolvency Service has extensive power to investigate directors and hold them to account through disqualification proceedings. These powers can be exercised in relation to directors of companies in insolvency proceedings (administration and liquidation) and in relation to live companies. Until December 2021, however, those powers did not extend to directors of dissolved companies. For unscrupulous directors in receipt of a government-backed Covid business loan who had no desire to repay or take responsibility for those loans (or indeed directors who were set on avoiding repayment of debts and avoiding accountability more generally) the best avenue was to dissolve their company.
Dissolution can be a simple and cheap process. It is a legitimate exit for solvent companies that have come to the end of their useful life and have no further purpose. It isn’t supposed to be a graveyard for companies with creditors who are going to be kept out of their money.
However, dissolution is a process that has proven to be open to abuse. The fact that the Insolvency Service had no investigatory powers in relation to dissolved companies was, perhaps, a function of a naïve belief that the process wouldn’t be abused. That abuse has honed into view with the fraud now associated with government backed Covid business loans.
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021
New legislation enacted in December 2021 now allows the Insolvency Service to investigate and disqualify directors of dissolved companies. The immediate aim is to tackle directors who seek to avoid repaying government backed Covid loans by dissolving their company but it has the effect of maintaining jeopardy for the directors of all dissolved companies for whom dissolution might hitherto have been a safe exit strategy that allowed avoidance of scrutiny.
There weren’t many hiding places for directors who, through mismanagement (or, worse, misconduct), contributed to the failure of the companies they managed to the detriment of their creditors. Now there is one fewer. Good D&O insurance protection just got even more important.
25 January 2022