Updated: 9th September 2021
When a liquidator is appointed, whether for a voluntary or compulsory liquidation, a key part of their role is to report to the Secretary of State/Official Receiver on the circumstances of the company’s decline.
This can place company directors at risk of allegations, including wrongful trading and misconduct, if any suspicious or negligent activity or transactions are uncovered. Various penalties can result from this, including disqualification and personal liability.
The liquidator’s report is an important aspect of liquidation. It enables the Insolvency Service to obtain a view of directors’ actions in the time leading up to insolvency, and take action where necessary to protect the interests of creditors and the wider public.
The liquidator needs to understand why the company has failed, and whether any actions that were taken by the director(s) could have contributed to the company’s cash flow position or worsened losses for creditors.
Company creditors and the public at large need protection from ruthless directors who deliberately leave debts unpaid, and then close down their company, only to start another soon after.
Although liquidators investigate and report on all cases, the fact that a company is placed into liquidation voluntarily demonstrates the directors’ intentions to fulfil their legal obligations and place creditor interests first.
In the case of a compulsory liquidation, however, where the directors haven’t taken the initiative, but waited for a creditor to wind up their company, the liquidator may undertake more stringent investigations of their actions prior and during insolvency.
The liquidator gathers information about the company’s affairs, including details of its assets, liabilities, creditors, and contracts, to gain an overall view of what might have happened to cause the insolvency.
The investigation also involves obtaining information from each director as to their role in the company and their actions leading up to insolvency. This could take the form of a written enquiry initially, but typically includes in-person interviews with each director.
It’s important for directors to assist the liquidator in their enquiries at every stage, providing a clear account of their conduct. The liquidator can interview former directors that were in office for up to three years before the liquidation, as well as other office-holders, such as company secretaries and senior officials.
The liquidator will report on any instances of misconduct or unlawful activity, and recommend to the Secretary of State/Official Receiver whether any further investigation or action might be required.
Included in the report will be details of any antecedent transactions, such as preference payments or transactions at undervalue, which may have contributed to the company’s poor financial position.
The report will provide a general overview of the company’s affairs, a detailed account of its journey into insolvency, and whether in the liquidator’s opinion, directors can be held to blame at any point during the previous three years.
In a voluntary liquidation the report would be sent to the Secretary of State, and in the case of compulsory liquidation, the Official Receiver. Directors found to have acted wrongfully or illegally face a range of repercussions, including:
Under the Company Directors Disqualification Act, 1986 (CDDA), directors can be disqualified from office for 2-15 years. This would render them ineligible for certain posts, such as school governor or a charity trustee.
If a director failed to cease trading when the company was insolvent, i.e. traded wrongfully, and this led to further losses for creditors, the director could be held personally liable for the additional sums.
If the liquidator encounters fraudulent activity during the investigation, they’ll pass the information on to the authorities and this becomes a criminal matter. In the most serious cases of fraud where directors have deliberately set out to defraud creditors, a prison sentence is possible, alongside disqualification and personal liability for unpaid debts. Failing to comply with the terms of disqualification is also a criminal offence, and could lead to a prison sentence.
As you can see, the liquidator’s report is a key part of the liquidation process for directors. The advantages of entering liquidation voluntarily are clear, and there are further potential benefits for directors in the form of director redundancy.
Real Business Rescue are insolvency experts and can provide more information on the liquidator’s report, and potential ramifications for directors. Please call one of our partner-led team to arrange a free, confidential consultation – with a broad network of offices around the country, we can quickly provide the guidance you need.
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