If there are findings of misconduct, this will be taken up by the Insolvency Service to seek action against the company director.

The insolvency practitioner appointed to liquidate the business will lead the investigation, or an Official Receiver, which is a liquidator appointed by the Insolvency Service when a business is forced to liquidate as a result of a winding up petition, also known as compulsory liquidation.

The investigation sets out to uncover wrongdoing that spans back over the years with a view to protecting the best interests of stakeholders, including company creditors. Guest author Sharon McDougall of Scotland Debt Solutions, a Scottish debt advice specialist, shares what happens during a company investigation during liquidation or administration.

What events take place during a company investigation?

The office-holder – either the insolvency practitioner or Official Receiver – will set out to establish the series of events that unfolded in the run-up to the decline of the business. They will seek to interview the company director(s) in person or issue a written questionnaire to capture their view on the matter and ask what action was taken to remedy the problems that inflicted the business.

They may also turn to company stakeholders to corroborate the director’s claims.

The company records will be investigated, in addition to the financial trail, such as transactions to back up the claims put forward by the director.

Once a report has been compiled, any findings of misconduct will be reported to the Insolvency Service. The consequences of unfit conduct can lead to director disqualification which means that the director can be disqualified from acting as a company director for up to fifteen years. If they break the terms of the disqualification, they could be fined or imprisoned for up to two years.

‘Unfit conduct’ includes to:

• allow a company to continue trading when it can’t pay its debts
• fail to keep proper company accounting records
• fail to send accounts and returns to Companies House
• fail to pay tax owed by the company
• use company money or assets for personal benefit.

The Insolvency Service will confirm in writing why they believe that the individual is unfit to be a director and whether they intend to proceed with the disqualification process or see the individual in court if they wish to defend the case.

What is investigated during the process?

The investigators will look for evidence of director misconduct which may involve any of the following:

• Transactions at undervalue – Company assets are sold for lower than their market value.
• Preferential payments – Selected creditors are paid due to preference, rather than according to the order prescribed by the Insolvency Act 1986.
• Fraudulent trading – When the director acts in a fraudulent manner, such as intentionally accepting payments when the business is in no position to continue.
• Wrongful trading – When the director continues to operate the business while it is knowingly insolvent as this worsens the financial position of company creditors.

An Insolvency Service investigation is serious because if company directors are found guilty of wrongdoing, the consequences can be detrimental. Along with director disqualification, the director could be forced to compensate the company which will then be fed to creditors, not to mention the reputational damage.

Insolvency and debt investigations

Seeing the whole picture in insolvency and debt cases is key to maximising returns to creditors. For more information on how ESA Risk can help to identify hidden assets or locate targets who have gone to ground, contact Mike Wright, Investigations and Risk Management Consultant, at mike.wright@esarisk.com, on +44 (0)843 515 8686 or via our contact form.

You can also learn more from our Insolvency & Debt Investigations brochure:

This article was written by guest author Sharon McDougall of Scotland Debt Solutions.