Liquidation: directors’ investigations explained

When a company enters liquidation, part of the liquidator’s role is to consider the conduct of its directors to ensure that they have acted properly, and in the best interests of the company’s stakeholders. Companies fail for any number of reasons, but it is only where there is evidence of wrongdoing, or unfit conduct that you may risk becoming disqualified. We look at directors’ investigations in practical detail below, in terms of the responsibilities of a company’s directors, its liquidators and those of the Insolvency Service.


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Investigations: the director’s role

As company director, you have a number of obligations to your company which, under the Companies Act 2006, include duties to promote the success of the company and to exercise reasonable care, skill and diligence. This applies to all companies generally, not only those which enter liquidation.

Although at times your business may feel entwined with your own personal finances, the company is, however, a separate legal entity and as such should be run according to what’s in the best interests of the company and its creditors, rather than for personal gain.

If your company enters liquidation, you will be required to provide the liquidators with all the company’s books and records, and co-operate generally with the liquidators’ requests for information, so that they can ensure that there is no evidence of wrongdoing in this regard.

In practical terms, this entails our staff organising a courier collection for physical records, a transfer of electronic records, and requesting log-in details for any online financial software.

It also means that each director will be required to complete a questionnaire relating to their roles within the company.

Investigations: the liquidator’s role

The liquidator will review the books and records of the company including accounts and bank statements, usually for the three years prior to liquidation.

If anything is found to require further explanation they may contact any of the company’s directors for clarification. If the directors fail to cooperate, the liquidators have the power to call for a public or private examination of the directors. In practice however, this is something that only rarely occurs.

Within 3 months of the liquidation creditors meeting, the liquidator will complete an online submission to the Insolvency Service. The submission will include information on any person who was a director at the time of liquidation, as well as anyone who has been a director in the three years prior, and anyone who may have acted as a director even if they were not identified as one at Companies House (such as shadow directors or de facto directors).

The liquidator will provide information on the company’s financial records, specifically detailing whether company officers were responsible for:

  • Incurring further debt when they ought to have reasonably known that the company was insolvent
  • Paying some creditors in preference to others, especially associated creditors
  • Using monies which should have been set aside for tax to continue trading
  • Disposing of assets for less than market value
  • Failure to provide goods or services which have been paid for
  • Failure to co-operate with the liquidator
  • Fraudulent behaviour

Investigations: the Insolvency Service’s role

The Insolvency Service will review the liquidator’s submission and take further action only if it deems it to be appropriate. There is no set test and each case is considered individually. It mainly considers whether there is sufficient evidence of wrongdoing, and if disqualification would be in the public interest.

The Insolvency Service has up to two years from the date of liquidation to commence disqualification proceedings.

Consequences

If a director is either taken to court and disqualified, or voluntarily agrees to be disqualified, it means that they can’t be a director of any UK company, or an overseas company with connections to the UK. In addition, they can’t be involved in the formation or running of a company, even if they are not formally a director.  Disqualification may also prevent them from working in certain roles, such as accountant, solicitor, barrister or pension trustee.

The period of disqualification runs from between 2 and 15 years, depending on the seriousness of the offences. Disqualification for more than 10 years is generally given for fraudulent conduct. The period of disqualification will usually be less if a director agrees to this voluntarily, rather than being disqualified by the court. Once disqualified, it is possible that a director can apply to court for leave to be exempted from their disqualification due to exceptional circumstances. Read more about directors’ disqualification here.

Final thoughts

The level of liquidations which lead onto a disqualification has historically been around the 3% mark. The Insolvency Service’s ethos is not to penalise every liquidating director, but only the small number who it decides have acted against the interests of their business’ stakeholders.

If you have any questions about directors’ investigations, or would like to talk about this in more detail with one of our business rescue experts, please feel free to contact us or use our booking system to arrange a meeting.