Company investigation during liquidation play an important role in both the administration and liquidation process through formal insolvency proceedings. They help to establish whether or not the company’s failure was due to any kind of misconduct. Investigations are conducted by the office-holder, who may be an appointed insolvency practitioner or official receiver. If they find evidence of misconduct, they can escalate the matter to the Insolvency Service (IS)
Company directors, and other company officials such as shadow directors, receive greater inspection during company liquidation investigations. The liquidator can look back several years or more to unveil possible misconduct or fraudulent behaviour. If fraud is uncovered the case may be escalated, resulting in a change from a civil to criminal investigation.
Company insolvency investigations help onlookers, other companies, and the public when directors are dishonest or constantly making careless decisions. These types of directors would usually have an advantage because of the company’s limited liability status and not held personally liable.
What happens during a corporate insolvency investigation?
Written correspondence
Directors fill out a written questionnaire so the company can better understand what exactly went wrong and the company’s financial position.
In-person interviews with directors
After conducting initial interviews with the directors of the limited company, further in-person interviews with each individual may follow to establish their role in the company’s failure.
Company books and financials
The company’s accounts and financial documents are carefully looked over as part of the examination. In addition, directors may need to hand over other types of documentation to back up their actions or give a timeline regarding events that occurred.
Interviews with other stakeholders
Other crucial employees, like company employees or solicitors, will be interviewed during the investigation for extra background information and to verify what the directors are saying.
Report to the Insolvency Service
If the liquidator discovers any wrongdoing, they will file a report with the IS. If it is recommended by them and in the public interest, a disqualification order may be sought on behalf of the Secretary of State.
What are the investigators looking for?
Among the matters and transactions a liquidator is investigating are:
- Transactions at undervalue: Sales of company assets at a lower cost than their market value, or ownership transferred to an affiliate of the director like a friend or family member.
- Preferential payments: payments made to a specific creditor instead of other company’s creditors. For example, when a company director chooses to repay a loan with a personal guarantee before repaying any other debts.
- Wrongful trading: Once a company is insolvent, its directors have a legal obligation to take action to minimize creditor losses. This may require the company to cease trading.
- Fraudulent trading: Unlike wrongful trading, this can involve illegal activities such as taking deposits from customers without any intention of actually fulfilling their orders.
Potential consequences of an insolvency investigation
Disqualification order
If the IS decides it is necessary, they may begin legal proceedings and apply to the court for a disqualification order under the Company Directors Disqualification Act (CDDA), 1986. This order usually lasts two years but could last up to 15.
Compensation order
A compensation order means that the director must make a payment to the company in order to compensate its creditors for some of their financial losses. The amount of the compensation order largely depends on how serious their actions were.
Reputational damage
If a director is disqualified, the personal and professional damage to their reputation may be difficult, if not impossible to repair. This damaging information will be recorded in Companies House database and will appear in any public search along with details of the case.
Prison sentence
If serious fraud is uncovered during an investigation, the possible sentence is a prison sentence. If a director breaches a disqualification order or undertaking, they could become personally liable for additional losses suffered by creditors because of the said breach which constitutes a criminal offence.
If your company is in danger of failing, it’s in your best interest to respond quickly to questions and requests for information from investigators. at risk of becoming insolvent, or perhaps it already is, Company Doctor can provide expert advice on what happens next. Please get in touch to seek advice and arrange a free, same-day consultation on solutions such as a Company Voluntary Liquidation. Leave an enquiry or contact us on 0800 169 1536
