Investigating suspicions of director misconduct during insolvency

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Article by Jon Munnery, Partner at UK Liquidators, part of Begbies Traynor Group.

During an insolvency procedure, such as company liquidation, standard practice dictates for an investigation to be launched into the conduct of the company director covering the events leading up to the liquidation. This is to provide a guarantee that the company director acted in the best interests of the limited company and fulfilled all legal responsibilities. During the insolvency process, the duties of the company director will fall to the creditors, i.e. any party which is owed money by the limited company.

What is a preference payment?

If the company director shows preferential treatment to selected creditors, this may indicate a conflict of interest to the disadvantage of creditors which are first in line to receive repayments. The Insolvency Act 1986 lays out a priority order for creditor repayments in the event of company liquidation. Failure to abide by this could result in the referral of your investigation to the Department of Business, Innovation and Skills (BIS) who will be responsible for delving further into your case.

If you choose to make a preference payment with the knowledge that you are unable to treat remaining creditors in the same way, you may be guilty of showing preferential treatment to the detriment of other creditors. During company liquidation, secured creditors are first in line to receive payments as they have a legal right to your property or assets. A preference payment can also refer to the transfer of company assets, such as property.

If it is judged that you treated creditors unfairly by making a preference payment, the recipient may be ordered to return the money. A licensed insolvency practitioner will advise you on any concerns when working with connected creditors.

What is a transaction at undervalue?

If your business is contingently insolvent or insolvent with a strong chance of achieving recovery, company administration may be an option for asset-rich companies. During company administration, company assets may be sold to raise cash to settle creditor debts. If any assets are sold at a discounted price, this could drastically reduce the funds available for creditor repayments, resulting in a breach of your responsibilities as the company director.

What is fraudulent trading?

Trading in a fraudulent manner is a criminal offence, whereas wrongful trading. i.e. trading while the business is insolvent is a civil offence. To prove that the company director has acted fraudulently, the insolvency practitioner will need to find evidence which shows that the director intentionally defrauded creditors. For example, if the company director continued to accept payments for orders knowing the business could not afford to deliver goods or services, this could be classed as fraudulent trading.

What are the repercussions of breaching director code of conduct?

During the director investigation conducted by the insolvency practitioner, there are a series of actions which can be enforced if you are found in breach of your duties or acting wrongfully. The repercussions of making a preference payment while your company is insolvent could result in director disqualification for a maximum of 15 years.

You could even be held personally liable for the debts of the business. If the amount owed is a substantial sum, this could push you into bankruptcy, or sequestration (Scottish bankruptcy). If you have an overdrawn directors’ loan and your business is struggling as a result, you could be held accountable for the entirety of the debt by acting falsely.

If your business is treading on soft ground and is likely to become insolvent, any action taken should be carried out with creditor interests in mind. Seek urgent advice from your appointed insolvency practitioner if you believe that you may be exposing your business to risk.

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