Are directors liable for their dissolved company's unpaid bills?
Newsletter issue - August 2022
On 15 December 2021 the government passed an Act which at the time was effectively 'under the radar' for many company directors but could have far reaching implications should their company be dissolved with outstanding tax liabilities.
The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 was enacted to enable the Insolvency Service to apply for a court order requiring a former director of a dissolved company, who has been disqualified, to pay compensation to creditors who have lost out due to a director's fraudulent behaviour. The 'Rating' part of the Act was passed to ensure that the coronavirus pandemic cannot be used as a reason for 'material changes of circumstances' for business rates appeals. The 'Directors Disqualification' part was passed to help HMRC and the Insolvency Service tackle the practice of directors dissolving companies to avoid repaying the Government backed loans put in place to support businesses during the Coronavirus pandemic but the legislation is intended to help all creditors.
What has changed?
For a long time HMRC has been able to chase directors of dissolved companies for up to six years from the date of dissolution for unpaid tax, but if they believe fraud has taken place or that the directors have been negligent in some way, they can chase for up to 20 years. The Insolvency Service has also long had powers to investigate (and disqualify) directors of both live and insolvent companies. However, directors of a dissolved company could not be held to account unless that company was first restored to the Companies House register which needs to be done through the courts. This proved a time-consuming and cumbersome procedure which inevitably resulted in abuse. It is easy for a company's owners to dissolve their companies (along with all the company debts) via the strike off procedure instead of going through a formal liquidation process, thereby avoiding scrutiny. It is also easy to dissolve the company but instead of complete closure carry on the same business through a new company (known as 'phoenixing').
The new legislation extends the Insolvency Service's powers enabling investigation of directors of dissolved companies without having to restore the companies to the register first. If a director's actions have caused loss to creditors the Insolvency Service can also apply to the court for a compensation order against the director personally.
'Weakness' in the new process
You can object to a limited company's application to be struck off if you are a shareholder or other interested party, such as a creditor, and have reason to stop the application (e.g. you are owed money). The 'weakness' in the new act is that it remains the job of a creditor to raise concerns about a dissolved company's director's behaviour with the Insolvency Service. Therefore the absence of a liquidator or administrator in the dissolution process means that some directors may not be brought to account if no-one objects to the company's closure. In addition, once a company is dissolved, there is no process by which a liquidator or administrator can investigate the conduct of directors. Therefore, it is likely that only extreme examples of misconduct will be investigated.
Practical point
Companies House automatically notifies HMRC of any application to strike off a company and will not allow the process to proceed if tax liabilities are outstanding. HMRC can make company directors and others 'joint and severally liable' for the company's tax liabilities but only where a penalty for facilitating avoidance or evasion has been charged (or proceedings to recover such a penalty have started).