What a liquidator investigates (and what they report to the Insolvency Service)

Every liquidator is required by law to investigate the conduct of every director and report to the Insolvency Service within three months of appointment. Most reports result in nothing. The ones that do not share a small number of patterns.

Why the investigation happens

Two statutes drive it. The Company Directors Disqualification Act 1986 requires the liquidator (the “office-holder”) to report on the conduct of each person who was a director in the three years before the liquidation. The Insolvency Act 1986 gives the liquidator the power, and the duty to creditors, to recover money through claims against directors where the law allows: wrongful trading, preferences, transactions at undervalue, misfeasance and the overdrawn loan account.

So there are two questions being asked at once. Should this director be disqualified? And is there money to recover from them for the creditors? The second one is often the more pressing for you.

What they look at

The liquidator works from the company’s records, the bank statements, Companies House filings, HMRC’s account, and your own answers. Expect questions on each of these.

• The directors’ loan account. The balance, how it arose, and whether dividends used to reduce it were lawful. This is the first thing examined because it is usually the largest recoverable sum.
• When the company became insolvent, and what happened after. The liquidator reconstructs the date you knew or should have known the company could not avoid insolvent liquidation, then examines every significant decision after it. Trading on past that point with no realistic prospect is wrongful trading.
• Payments in the six months before liquidation (two years for connected parties). Who got paid and who did not. A family member repaid, a friendly supplier settled, your own loan cleared while HMRC waited: these are preferences.
• Assets that left the company. Vehicles, equipment, stock or the business itself transferred for less than value, particularly to a connected person or a new company. These are transactions at undervalue.
• HMRC. Whether PAYE, VAT and corporation tax were paid or whether the company was in effect funded by not paying them. Persistent non-payment of Crown debts while trading on is a recurring feature of disqualification cases.
• Bounce Back Loan. Eligibility, the turnover declared, and where the money went in the 90 days after drawdown.
• The records themselves. Were proper accounting records kept and delivered up? Failing to keep or hand over records is a ground for disqualification on its own.
• Phoenix activity. Whether a new company has started trading with the old company’s assets, customers or name.

The conduct report

Within three months the liquidator files a report online with the Insolvency Service stating, for each director, whether there is anything that may indicate unfit conduct. The threshold is low: the liquidator reports the facts, and the Insolvency Service decides whether to investigate further. You do not see the report.

The Insolvency Service then reviews it against its own criteria and public interest considerations. Where it decides to pursue a case, it has three years from the start of the liquidation to bring proceedings. It will usually write to you first, inviting an explanation, and may offer a disqualification undertaking (a voluntary ban that avoids court) in place of proceedings.

What happens next, in practice

For the great majority of directors: nothing. The liquidator’s claims, if any, are settled or pursued as civil matters; the conduct report is filed; no letter arrives.

Where action follows, it is concentrated in cases with one or more of: a large unexplained loan account, Crown debts used as working capital over a long period, a Bounce Back Loan that did not go into the business, assets moved to a new company, or missing records. Disqualification periods run from two to fifteen years; the bulk of cases fall in the three to seven year band. Separately, the liquidator may bring civil claims to recover money, and in rare cases of dishonesty the matter is referred for criminal investigation.

How to be in the best position

Cooperate fully and early. Deliver the records when asked, answer the questionnaire completely, and explain the figures rather than leaving the liquidator to infer. Do not create documents after the event. Do not move money or assets between the decision to liquidate and the appointment. And have the conversation about your loan account, your guarantees and any awkward transactions with your own practitioner before they are appointed, not after. In a voluntary liquidation that conversation is available. In a compulsory one it is not.

What to do today

1. Gather the company’s accounting records, bank statements and HMRC correspondence so they can be handed over complete.
2. Write down, with dates, when you concluded the company could not recover and what you did after that.
3. Make a list of every payment to yourself, family members or connected companies in the last two years.
4. Take all three to a licensed insolvency practitioner before any appointment is made.