What Happens In A Company Insolvency Investigation?

July 11, 2023 / Business Insolvency

Liquidation is a common procedure for companies. Many directors will enter their company into a particular liquidation procedure at one point or another, for a range of reasons. 

For some, their company has run its course, and it makes financial sense to wind it up and extract its retained profits. For others, liquidation can prove to be a viable solution for dealing with overwhelming debt. However, although liquidation is certainly an effective option for insolvent companies, it has one unique factor that some directors may not know. Namely, an appointed liquidator is obligated to investigate the company’s finances and the conduct of the directors. This investigation is known as a company insolvency investigation.

In this article, Clarke Bell will discuss what happens in a company insolvency investigation, what the investigator will look for, and the implications it can have on you.

When will a company insolvency investigation happen?

Company insolvency investigations occur as part of an insolvency procedure. These investigations will be carried out either by the liquidator appointed by directors, or an official receiver appointed by the courts. Although there are some differences depending on the insolvency procedure in use, the main goal is the same; to assess whether directors have had a hand in the financial decline of a company, or have engaged in misconduct. Although they can be inconvenient, company insolvency investigations ensure suppliers, creditors, and the general public are protected from unscrupulous directors who would otherwise enjoy limited liability protections. 

For most directors, there is nothing to fear from these investigations, as they have conducted themselves in an appropriate way.

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Creditors’ Voluntary Liquidation

A Creditors’ Voluntary Liquidation (CVL) is an insolvency procedure that directors can take voluntarily. Directors appoint an insolvency practitioner of their choosing to the role of liquidator, who will assume control over the company while the procedure is ongoing. Whilst acting as liquidator, part of their role involves identifying any company assets and disposing of them efficiently, distributing the relevant proceeds amongst creditors. The liquidator is also responsible for winding up the company once all distributions have been made. Although there is much more to CVLs than this overview, we will focus on the investigation aspect for this article. For more information on CVLs, read our complete guide to the process.

The liquidator will also be tasked with opening an investigation into company finances and the conduct of its directors. It is important to note that there is no assumption of guilt; the investigation is normally a formality that rules out misconduct to the benefit of directors, rather than a marker of suspicion or otherwise detrimental. In this investigation, the liquidator will closely examine company accounts over a period of time before liquidation proceedings, and do the same for the directors’ conduct. The investigator will then draft a report detailing their findings and send it to the Insolvency Service. If any misconduct is found, the Insolvency Service will determine the repercussions.

Compulsory liquidation

Compulsory liquidation is a form of involuntary liquidation, typically coming as a result of creditors losing faith in a company’s ability to make repayments. To recoup their money, outstanding creditors may submit a winding-up petition to the courts, which could lead to a court-ordered liquidation for the company in question. If this occurs, the courts will appoint a liquidator to carry out the procedure, rather than allowing directors to make the decision. This liquidator is also known by the term “official receiver”.

During compulsory liquidation, the investigation is carried out in much the same way as in a CVL. The official receiver will take control of the company and its finance, ensuring creditors are repaid to the best of their ability, but also examining the conduct of directors. 

However, additional scrutiny may be applied during compulsory liquidation, as unlike in a CVL, directors have not demonstrated a willingness to act in the best interests of creditors. Instead, action has been taken on their behalf. That said, this will not influence the results of the investigation, as only evidence of misconduct will have an impact.

What is the process of a company insolvency investigation?

The process of a company insolvency investigation is the same in both CVLs and compulsory liquidations, with the exception of how an investigator is appointed. 

To begin with, directors will be handed a questionnaire that they must fill in. This questionnaire aims to gather the directors’ version on why the company failed, and what actions they took to stop it. The investigator may hold one-on-one interviews with each director and interviews with other stakeholders, if they deem it necessary. In essence, this serves to elaborate on the details provided in the questionnaire, and may be skipped entirely in some cases.

Once the investigators have a grasp on the situation as described by the directors, they will examine the company’s accounts. This part is crucial, as it often brings to light evidence of misconduct, or rules it out entirely. At this stage, investigators will pore over any financial documentation the company has, and may request additional documents from directors, if necessary.

After this examination of the company’s financial history, if any evidence of wrongdoing is found, the investigator will report to the Insolvency Service. They will then decide whether to pursue legal action against the directors.

What do investigators typically look for?

Some of the most common infractions investigators will look for include:

  • Wrongful trading – This occurs when directors do not act in the best interests of creditors, e.g. directors who do not act to minimise creditor losses once the company is insolvent.
  • Transaction at undervalue – This refers to the sale of assets considerably below their market value, e.g. to friends, family or a company the director associates with.
  • Preferential payment – This refers to the payment of certain creditors in preference to others, e.g. repaying a loan secured by a personal guarantee to protect a director’s personal finances, or paying back money lent by parents before anyone else.

Penalties for director misconduct

If evidence of misconduct is found, guilty directors may face penalties at the recommendation of the Insolvency Service. These penalties can include one or more of the following:

  • Disqualification of a director’s license for 15 years, including leadership positions in other companies
  • Fines
  • Compensation order
  • Personal liability for company debt
  • Prison sentence

Clarke Bell can help you

If your company is struggling to repay its debts, Clarke Bell can help you. 

We have more than 28 years of experience in helping companies solve their financial problems, and we can do the same for you. 

Contact us today for your free, no-obligation advice.