What is a Director’s Conduct Report during liquidation?

What does a directors report during insolvency contain?

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 and liquidation

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 position at all times.

Once a director knows - or ought to know - that their company is insolvent, they have a number of legal responsibilities that they must adhere to. One of these is to prioritise the interests of creditors over those of the directors and shareholders. In practice, this means not engaging in any activities which could increase creditor losses or worsen their position. Actions which should be avoided include obtaining further credit, disposing of company assets for under their true market value, and paying some creditors at the expense of others.

This helps to protect creditors from suffering further financial losses, and outs the onus on the company to act quickly at the early signs of 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.

When a company becomes insolvent it is often the case that it needs to cease trading immediately in order to halt any further decline. The route forward is best determined by a licensed insolvency practitioner who can assess the position of the company and advise on the best next steps.

 

 

 

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What are the potential consequences of a director’s report in liquidation?

An insolvency practitioner is duty-bound to conduct an investigation into the conduct of an insolvent company's director during the period leading up to its financial decline. If suspicious transactions - such as selling assets at undervalue or prioritising certain creditors over others - are discovered, a report will be submitted to the Insolvency Service who will determine the outcome.

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Directors found guilty of wrongdoing can face a number of penalties depending on the severity of their actions. 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.