What company directors need to know about liquidation investigations
Liquidation is a viable method to close solvent and insolvent companies. If your business is solvent (it can pay its debts before it closes), the liquidator will not investigate the conduct of the directors. However, if your company is insolvent and enters liquidation, the situation is a bit different.
In this case, the liquidator will investigate your conduct as a company director leading up to the liquidation. If they find that you did not act in the best interests of your creditors when you knew the company was insolvent or your actions caused or contributed to the business’s decline, you could face serious penalties.
What is a liquidation investigation?
What is a liquidation investigation?
A liquidation investigation scrutinises the actions of the directors of companies that enter insolvent liquidation. All company directors have legal duties they must fulfil. The investigation aims to determine whether the directors met those duties and if the company was mismanaged.
Who conducts liquidation investigations?
In Scotland, it is the job of a licensed Insolvency Practitioner, acting as the liquidator, to investigate the conduct of directors. That’s the same regardless of whether you enter a Creditors’ Voluntary Liquidation (CVL) or a Compulsory Liquidation.
In England, Wales and Northern Ireland, when a company enters Compulsory Liquidation, the Official Receiver will investigate. The Official Receiver is the government’s version of an Insolvency Practitioner and is part of the Insolvency Service.
Regardless of who conducts the investigation, the process is essentially the same. The key difference is that in a CVL, as you initiate the liquidation process, you have already demonstrated a commitment to protecting your creditors’ interests. That reduces the likelihood of receiving a penalty.
What does the liquidator focus on during their investigation?
What does the liquidator focus on during their investigation?
The liquidator will be looking for any evidence of wrongdoing or misconduct on behalf of the directors. Below are some of the areas they will examine.
Company payments
When a company becomes insolvent, the directors are legally obliged to act in the best interests of their creditors as a whole. That means they should treat them all fairly. If the liquidator finds evidence that directors have made payments to certain creditors but ignored others, known as a ‘preference payment’, you could receive a penalty. An example is repaying a loan from a family member but ignoring debts to a supplier.
Trading while insolvent
To protect your creditors’ interests, company directors are expected to cease trading and seek professional advice as soon as they know their business is insolvent. If you keep trading and accrue further debts despite knowing there’s no chance the company will recover, you could face further action from the Insolvency Service.
Fraudulent trading
Entering into transactions to deliberately defraud your creditors could lead to a prison sentence. Examples include taking credit from suppliers when you know you cannot make the repayments or accepting customer orders with no intention of fulfilling them.
Sales of company assets
The liquidator will scrutinise transactions involving the sale of company assets during or leading up to the liquidation. If they find you sold assets for less than their true worth or transferred them to family members or other connected parties, it will raise a significant red flag and you could become liable for the losses.
Dividend payments
You can only pay dividends from profits. If the liquidator finds the directors paid themselves dividends despite there being insufficient profits to do so, you could face accusations of misconduct.
Director’s loan accounts
A director’s loan account becomes overdrawn when you borrow money from the company you do not repay. When the company enters liquidation, the overdrawn director’s loan account becomes an asset that the liquidator will look to recover for the benefit of the creditors. They will also investigate whether the loan created financial difficulties or contributed to the company’s decline.
Do I have to cooperate with a liquidation investigation?
Do I have to cooperate with a liquidation investigation?
In a word, yes. You are legally obliged to cooperate with the investigator and answer their questions. You must hand over company books and records as requested, complete an initial questionnaire and attend an interview with the liquidator if you’re asked. Failure to do so could lead to allegations of misconduct and potential penalties.
What penalties can I face after a liquidation investigation?
What penalties can I face after a liquidation investigation?
There are several penalties the Insolvency Service can impose depending on the circumstances of your case. If evidence is found of any of the above, you could receive a fine or be made personally liable for some or all of the company’s debts. If you cannot pay what you owe, personal assets including your home may be at risk and it could even lead to sequestration.
If the liquidator suspects improper or unfit behaviour on the part of a director, you could be disqualified from acting as a director for between two and 15 years. That will prevent you from forming, managing or marketing a limited company in the UK. In serious cases of fraud, it becomes a criminal matter and you could receive a maximum prison sentence of two years.
Seek advice early
Seek advice early
In a word, yes. You are legally obliged to cooperate with the investigator and answer their questions. You must hand over company books and records as requested, complete an initial questionnaire and attend an interview with the liquidator if you’re asked. Failure to do so could lead to allegations of misconduct and potential penalties.
