Investigations and Enforcement – Advice for directors being investigated by the Insolvency Service

Reviewed: 4th July 2016

Investigations into director conduct are carried out by the Insolvency Service when a company enters compulsory liquidation. Other formal insolvency procedures can also trigger an investigation if director conduct comes into question, or if it is deemed to be in the public interest.

The Insolvency Service investigations team acts on behalf of the Secretary of State, and has powers under civil rather than criminal law. If criminal activity is suspected, they may decide to pass the case to the police and/or other relevant bodies.

If you are currently undergoing investigation, or fear that one is imminent, Real Business Rescue can help. Our partner-led team has decades of experience advising company directors in times of trouble, and will be able to clarify your position as a director.

What investigations take place during the insolvency process?

During formal insolvency, the administrator or liquidator will file a report with the Insolvency Service on director conduct. The elements of investigation at this stage may include:

Interviewing directors and other key officers of the company
Examining the company’s accounting records
Gathering evidence from stakeholders, including employees, accountants, and solicitors

If sufficient evidence indicates director misconduct, a report is sent to the Insolvency Service who decides whether or not to pursue the matter through the civil court, under the Company Directors Disqualification Act (CDDA).

So how should you proceed at this time?

Obtaining professional independent advice is clearly an important step once the Insolvency Service has made you aware that a full investigation is underway.

When you know the reasons for the investigation, it’s important to:

Respond promptly to any communications
Establish more detail on why you are being investigated
Gather evidence from third parties to support your own case
Consider a reasoned and consistent explanation as to why the events under investigation took place

How long an investigation takes depends on its complexity, but also on how quickly you and others respond to questions or requests for information.

The law changed on 1^st October 2015 in relation to director disqualification - in cases where insolvency commenced after this date, a time limit of three years for applications is in place; prior to this date a two-year time limit applies.

Why are you being investigated?

Instances where allegations of unfit conduct as a director could occur, include:

Failing to put creditor interests first as an insolvent company
Failing to prepare and file statutory accounts and returns
Deliberately reducing the returns available to creditors
Failing to pay HMRC tax and National Insurance liabilities
Not cooperating with the insolvency practitioner during their investigations

What are the possible ramifications?

You may be disqualified from being a director, or from being involved in the formation/running of a company for up to 15 years. If creditors have suffered a material loss, you could also become liable to pay compensation.

A report is sent to the Insolvency Service Authorisations Team, who decide whether or not there is sufficient evidence, and it is in the public interest, to apply for a Disqualification Order through the courts.

Figures released by the Institute of Chartered Accountants in England and Wales (ICAEW) show there was an increase of 56% in director disqualifications by the Insolvency Service between January and March this year.¹

Take action quickly if you are under investigation. You can call our experts at Real Business Rescue for a same-day meeting free of charge. We’ll discuss your situation, and identify the best way forward.