A New Environment for Directors’ Duties? Navigating the UK’s ‘Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill’

As the UK Parliament returns from its summer recess, new legislation will be considered in the insolvency space. One such piece of legislation which finished its third reading in the Commons and is awaiting its second reading in the Lords is the ‘Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Bill,’ (the ‘Bill’) which proposes a technical yet meaningful solution to ‘rectify’ a loophole in insolvency procedures. The Bill aims to prevent company directors from dissolving a company either without being compelled to place it into insolvent liquidation or to avoid an investigation of misconduct or payment of creditors and government loans, as well as combatting a form of ‘phoenixism.’ The concern has been that creditors restoring a company to then immediately put it into liquidation was almost always a poor remedy. But beyond the stated aim of protecting government debt, an unacknowledged angle may be to prevent directors seeking to exit a market due to the impending costs of environmental remediation in an age of changing environmental standards. 

Environmental, Social and Governance (ESG) regulation may impose costs of compliance on existing companies and markets, and be used as an excuse for directors to close down an already struggling business. Naturally, no environmental safeguard is without cost, but in a failure of a polluting business the loss falls not just on creditors but the public who ultimately pick up the tab for the costs of remediation and repair. The Bill, as drafted, will dovetail with existing duties in the Company Directors Disqualification Act 1986 to ban errant directors and also strengthen the hand of regulator (BEIS or the Official Receiver) to either appoint a liquidator under their existing powers or to directly pursue directors. Previously, this kind of environmental led enforcement has only been seen for the biggest polluting industries with well telegraphed issues, as with British Steel in 2019 (see [2019] EWHC 1304 (Ch)). However, smaller industries are just as capable of polluting the environment, and there lies the temptation of directors to walk away rather than to engage with their duties. The Bill, which may have anticipated government debt in the form of unpaid loans and taxes—particularly from the COVID-19 stimulus—may have a bigger impact on how companies respond to their environmental duties. It will now be harder for directors to quietly liquidate a company, rely on creditor inertia, and leave public authorities deal with any environmental issues.

Clauses 2 and 3 of the Bill, or the amendments of Sections 6 and 7(2) of the Company Directors Disqualification Act 1986, ultimately provide the same remedies in a voluntary dissolution as liquidation, and an alternative action for creditors who would otherwise be required to restore a dissolved company to the register before they could pursue action under sections 213 and 214 of the Insolvency Act 1986. While the Bill does not provide any wider power akin to allowing transactions to be unwound in any insolvent liquidation, it focuses on enhancing good corporate governance by providing a penalty for directors whose conduct led to a company’s dissolving and resulted in losses to creditors. The Bill has also provided more guidance on disqualifying unfit directors from companies, in line with the Company Directors Disqualification Act 1986.

As noted before, only the very largest insolvencies have caught the eyes of officials, but with BEIS now seemingly committed to focusing on key sectors of the industrial economy—including light industry—could this be an additional weapon in their arsenal? Consider a scenario similar to the facts in Cambridge Water Co Ltd v. Eastern Counties Leather plc [1994] 1 All ER 53, where a borehole was contaminated with perchloroethylene from a tannery, violating a 1980 European Community Directive. These concerns led to the first draft of the Bill failing its RPC impact assessment with concerns that small companies might bear a disproportionate burden to prove their compliance. Future changes in environmental regulation may prompt a light industrial company to cease trading if the compliance costs are too high, thus risking any environmental contamination clean-up and remediation. Given the interests of upset creditors as well as local and national authorities, the Bill could still offer a new angle for private action, better governance, and perhaps even a better environment. 

With the technical changes provided by Clauses 2 and 3 of the Bill, private and public creditors will effectively be granted a new remedy to go after company directors directly without having to restore the company to the Register, opening the possibility for better governance, and reducing the likelihood of such directors to phoenix their company or continue to sit on other boards. The Bill is government-sponsored and given its rapid progress through Parliament, it looks likely to become law sometime in October this year.

Adela Jones is an LLM LPC candidate at The City Law School and has served as a judicial extern in US District Court.