Updated: 1st February 2021
When an insolvent limited company enters liquidation, one of the liquidator’s key duties is to investigate the causes of its financial decline. This includes looking into the conduct of directors during the time leading up to insolvency.
Their findings are incorporated into a director’s report, with a recommendation regarding any further action that may be needed. The report is then sent to the Insolvency Service, who acts for the Secretary of State, for further scrutiny on whether civil or criminal wrongdoing has taken place. If criminal activity is suspected, the case may be passed to the police.
Director conduct is a major issue in the liquidation of a company. Under the Companies Act, 2006, directors take on a range of responsibilities and are obliged to fulfil certain duties, one of which is being fully aware of their company’s financial status at all times.
This helps to protect their creditors from suffering financial losses, and allows the company to act quickly at the decline stage to avoid full insolvency. If a director is found to have acted wrongfully or unlawfully, or their conduct is in any way to blame for the company’s demise, the director’s report will provide detailed information.
There are three different types of director’s conduct report that may be prepared:
D2 Final Report
A D2 final report is provided when the liquidator has found nothing untoward to report to the Secretary of State, and this concludes their investigation
D2 Interim Report
This is issued if the liquidator needs more time to pursue their investigations
The liquidator issues a D1 report if they’ve found something they believe is significant in the failure of the company with regard to director actions. This is the report on which action may be taken by the Insolvency Service, and can mean misconduct or mismanagement of the company has taken place.
If the office-holder has established wrongdoing on the part of one or more directors, they will write a D1 report and send it to the Insolvency Service for the circumstances to be further scrutinised.
The liquidator may believe more than one director is responsible for mismanagement, but if not all of the directors are implicated, they will make sure to specify who they believe to be at fault.
The D1 report is reviewed by the Insolvency Service, and checks made on the background and history of each director suspected of wrongdoing, including whether or not they’ve been involved with any other failed companies in the past. Specifying individuals in this way protects directors who aren’t under suspicion from the penalties and sanctions that can be applied in these cases.
D2 final report
If a D2 final report is issued, directors aren’t under suspicion of wrongdoing with regard to the insolvency of their company, and are free to move on to other ventures without sanction.
D2 interim report
Directors may still face civil or criminal action for wrongdoing or misdemeanours in relation to the failure of their company, and must wait until the liquidator has completed their investigation in full to find out more.
The Insolvency Service can penalise directors in various ways under civil law, and has up to two years to take action, although in some cases they may apply for an extension to this time period.
Sanctions can include:
If you’re concerned about an investigation following the liquidation of your company, or you would like more information, Real Business Rescue can help. We’ll establish where you stand as a director of an insolvent company, and provide the reliable guidance you need. Please contact one of our partner-led team – we offer free same-day consultations and operate a network of offices throughout the UK.
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