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Understanding Director Investigations During Company Liquidation

In the event of a company entering into insolvent liquidation, the liquidator is obligated to examine the actions of the directors to determine if any impropriety has taken place during the period leading up to insolvency.

These investigations safeguard the public from willful fraudulent activities by those in control of operating companies, as well as persistent or systemic directorial negligence. What exactly do these investigations involve, and do they vary between compulsory and voluntary insolvent liquidations?

Compulsory liquidation


In the event that a company is subjected to compulsory liquidation, the Official Receiver carries out extensive investigations into the conduct of both yourself and other directors. This is because, by allowing a creditor to wind up the company, you have failed to prioritize the interests of your creditors.

If, for example, you had placed your company into voluntary liquidation, you may have been able to prevent additional losses suffered by your creditors. Such considerations are taken into account by the liquidator.

Therefore, it is generally unwise to wait for a creditor to initiate liquidation proceedings against your company when you could take the proactive step of initiating Creditors’ Voluntary Liquidation (CVL).

Creditors’ Voluntary Liquidation


Although not an ideal outcome for any company, initiating a Creditors’ Voluntary Liquidation (CVL) can provide some protection for both directors and creditors. This process can be initiated by company directors, and if you are uncertain about the solvency of your business, minimizing creditor losses should be your top priority.

By entering a CVL, you can prevent further financial loss and retain some level of control over the proceedings, which is not possible in cases of compulsory liquidation. While the liquidator will still conduct an investigation following a CVL, demonstrating your commitment to helping your creditors may reduce the severity of any penalties.

So, what triggers an investigation, and what are the liquidator’s objectives?

Investigating a company in liquidation


During liquidation, the liquidator conducts investigations by interviewing you and other directors, reviewing financial records, and speaking to employees and external professionals like your accountant. These investigations aim to identify any misconduct during the period leading up to insolvency and liquidation. Here are some of the issues the liquidator will look into:

Transactions at undervalue: These occur when an asset is sold for less than its actual value. The liquidator will investigate these transactions and also scrutinize any asset transfers made to family members or friends.

Preference payments: When one creditor is repaid over others, it is known as preference payment. This can happen when you choose to repay a loan with a personal guarantee or pay off a loan from a family member instead of other lenders.

Wrongful trading: If you continue trading when the company is insolvent, you may be accused of wrongful trading. For example, if you wait for a creditor to wind up the company, and as a result, creditors suffer more financial loss, you could be held personally liable for the additional debts.

Fraudulent trading: Fraudulent trading is a deliberate act to worsen the position of creditors. This differs from wrongful trading as there is a definite intention to defraud. For instance, taking deposits from customers for goods you know you cannot deliver.

Consequences for Directors following an Investigation


In case of wrongdoing, directors could face disqualification for a period ranging from 2 to 15 years. They might also be held personally liable for a portion or all of the company’s debts. When the veil of incorporation is lifted, directors could face severe consequences, including criminal charges leading to imprisonment.

If you’re concerned about a liquidator’s investigations, demonstrating that your actions as a director leading up to insolvency were aligned with your duties could prevent further legal actions against you. By doing so, the liquidator will have fewer grounds to pursue you for misconduct.

Preparing for Liquidation: Why Planning Ahead is Important


To minimize the impact of a liquidator’s investigation, seeking professional assistance at the earliest opportunity is crucial. Seeking guidance from a licensed IP is required if your company becomes insolvent, but it is recommended to consult with a specialist well in advance of any insolvency issues.

If you need more information on liquidator’s investigations or require reliable independent advice, reach out to our team of licensed IPs at UK Liquidators. As insolvency specialists, we provide free same-day consultations and operate from various offices across the country.

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