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Powers to Disqualify Directors of Dissolved Companies on the Horizon - How Will This Impact Charity Trustees?

on Tuesday, 06 July 2021.

A new bill aims to introduce important changes to the director disqualification regime in England and Wales and will extend investigative powers to include former directors of dissolved companies, including charitable companies.

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill will be applicable to incorporated charities to which the provisions of the Company Directors Disqualification Act 1986 (CDDA) already apply. For example, charitable companies limited by guarantee (CLGs) and charitable incorporated organisations (CIOs), as well as non-charitable companies, for example any non-charitable trading subsidiaries.  

Whilst directors of charitable companies are known as trustees, they are company directors at law and references to 'trustees' in this article are to those individuals who are or act as directors of charitable companies.

What Are the Current Rules Under the CDDA?

The director disqualification regime in force at present applies to trustees and directors of non-charitable companies (for example non-charitable trading subsidiaries) which enter into a formal insolvency process such as liquidation or administration. The regime at present does not require any investigation into or accountability for trustees and for directors of companies who opt to wind down their companies via a voluntary dissolution route at Companies House using form DS01, or are struck off by the Registrar of Companies - in a charity context this applies to CLGs and non-charitable trading subsidiaries, or via the Charity Commission for CIOs.

The well-documented decision in the Kids Company case which concluded earlier this year has already exposed the ways in which the CDDA can apply in a charities context, even if, in that particular case the trustees were not disqualified.

It should be noted that the disqualification regime under the CDDA is led by the Insolvency Service and is separate from the powers that the Charity Commission have to remove an individual as a trustee or prevent them from acting as a trustee. Disqualification as a director under the CDDA (whether brought in the context of a charitable company or a commercial enterprise) prevents an individual from being a trustee of any charity, including unincorporated ones, during the period of disqualification without permission from the court or the Charity Commission.

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What's in the New Bill?

The changes proposed by the new Bill, once implemented, will have a fundamental impact on trustees, and on directors of non-charitable companies, who previously thought they could slip under the radar of insolvency investigations by closing down using the voluntary dissolution route at Companies House or the Charity Commission, rather than opting for a formal insolvency process.

The Bill seeks to extend powers to investigate the conduct of company directors to include former directors of dissolved companies, with the aim of addressing public concerns about the abuse of limited liability and the voluntary dissolution process. The Bill also seeks to discourage the voluntary dissolution process being used as a means to fraudulently avoid repayment of government loans, for example loans under the Bounce Back Loan Scheme during the coronavirus outbreak which was available to businesses and charities.

If enacted, the Bill will amend certain provisions of the CDDA, introducing new powers such as:

  • the Secretary of State and the Official Receiver will be able to investigate the conduct of former trustees of dissolved charitable companies and former directors of other dissolved companies
  • the disqualification regime will be extended to include former trustees of dissolved charitable companies and former directors of other dissolved companies
  • the Secretary of State will be able to seek compensation where the conduct of former trustees of dissolved charitable companies and former directors of other dissolved companies has led to losses to creditors.

The Bill as drafted suggests that the new powers are intended to have retrospective effect, meaning that they could be used for charitable companies and other companies dissolved prior to the legislation being enacted.

How Does the New Bill Affect Charities?

The proposed changes mean that it is more important than ever for trustees looking to wind up or dissolve a charity, and for trustees who have other directorships and are looking to cease trading, to take advice at an early stage to ensure they are closed down in an appropriate manner.

Taking advice early may help trustees better understand the prospect of any personal liability being attached to them and identify ways to mitigate the risk of that happening. Trustees who also hold positions as directors of other companies should also be aware of the impact of the CDDA, and the extensions under the Bill as they could impact on their future ability to act as a trustee.

If you’ve got any questions about how the CDDA generally works in relation to charities, or this proposed extension of it, please contact us.

Professional advisors should also be aware of these proposed changes if any of their clients are considering dissolution or have recently been dissolved and are concerned about the retrospective element of the Bill.

The Bill is currently progressing through Parliament, and we will continue to keep you updated of any developments.

If you have any queries about any of the above, please do not hesitate to contact Ambuja Bose in our Insolvency and Restructuring team on 07469 850886. Alternatively, complete the form below.

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