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What happens during a liquidation investigation?

Investigation on financial records
Date Published: 26/10/2023

What does a liquidation investigation mean for a company director?

When a company goes into insolvent liquidation, the liquidator will investigate the actions of the directors to determine to what extent, if any, they are responsible for the company’s failure. They will carry out an investigation whether you choose to liquidate the company voluntarily or it is forced by the court.

The liquidator will want to see whether there have been any examples of misconduct, wrongful trading or fraudulent activity in the three years leading up to and during the company’s insolvency. If they uncover wrongdoing, you could be made personally liable for company debts or even face a director disqualification. 

What is a liquidation investigation?

Company directors have certain legal duties they must fulfil when running a business. When a company fails, the Official Receiver or liquidator must conduct an investigation to ensure those legal duties were met.  

The investigation typically involves interviews with the directors, an examination of the company’s financial records and document reviews to find out whether the company has been mismanaged. The aim is to determine why the company failed and whether the Insolvency Service should take further action against the directors. 

Who conducts a liquidation investigation?

That depends on whether you liquidate the insolvent company voluntarily via a Creditors’ Voluntary Liquidation (CVL) or wait to be wound up by the court. In a CVL, the insolvency practitioner you appoint to liquidate the company will carry out the investigation. In a Compulsory Liquidation ordered by the court, it will be the Official Receiver

Regardless of who it is, the process will be the same. The key difference is that by entering into a CVL, you are being proactive in trying to limit your creditors’ losses, which means you’re less likely to receive sanctions. 

What happens during a liquidation investigation?

As part of their initial fact-finding, the liquidator will require you to complete a questionnaire. It will ask your views on why the company failed and what you did to try and prevent it. The liquidator may also ask you to attend an interview to elaborate on the answers you gave in the questionnaire. By complying with their request and answering their questions fully and honestly, you will reduce the risk of further action being taken against you. 

Once the liquidator understands the situation, they will also look at the company’s accounts and other documents for evidence of wrongdoing. They may also request that you provide additional documents and talk to other stakeholders, such as company employees and accountants, to gather more evidence. 

If there is sufficient evidence of wrongdoing, the investigator will send a report to the Insolvency Service. It will then decide whether to pursue the matter and what action to take.   

What issues do liquidators look for during their investigations?

Liquidation investigations typically focus on a few specific areas. The liquidator will want to ask you about the following:

Payments made by the company

Has the company made any payments that favour one creditor over another in the time leading up to the insolvency? For example, have you repaid a loan secured by a personal guarantee in full or paid a connected party, such as a family member, but not repaid anyone else? This type of ‘preference payment’ could lead to personal liability issues. 

The transfer and sale of company assets

They will also want to see whether there’s evidence that you have sold company assets for less than their market value or transferred company assets to a family member, thereby reducing the return for your creditors.

Dividend payments

Any dividend payments made in the period when the company was failing will also be looked at closely. If you have taken dividends out of the company when there were insufficient profits to do so, they will be deemed illegal and you could face accusations of misconduct.

Director’s loan account

If you have an overdrawn director’s loan account when the company fails, it means you have borrowed money from the company that you have not repaid. That could be seen as contributing to the company’s decline and the liquidator can pursue you through the courts to force the repayment. 

The misuse of Bounce Back Loans

The investigator will want to know whether the company secured a Bounce Back Loan and how you used it. If they find that you used the loan to benefit you personally, you could be disqualified or made to repay the outstanding sum.   

Trading while insolvent

The investigator will also want to establish the timeline around the company’s insolvency to ensure you fulfilled your legal duty to act in the best interests of your creditors. Usually, that means ceasing trading as soon as you are aware the company is insolvent. If you carried on trading despite knowing there was no realistic prospect of a recovery, you could face disqualification.  

What are the potential consequences of a liquidation investigation?

If the investigator finds evidence of misconduct, the Insolvency Service may choose to take further action. The penalties it can impose include one or more of the following: 

  • Fines
  • A compensation order to pay an individual creditor, group of creditors or pay funds into the insolvent company’s estate
  • Personal liability for company debt
  • Disqualification from acting as a director or being involved in the management of a company for up to 15 years
  • A prison sentence of up to two years 

Need advice?

If your company is failing and you’re worried about the potential implications of a liquidation investigation, we can help. We will explore all the options available to you and advise you on the steps you can take to protect yourself from the adverse consequences of liquidation investigations. Please get in touch for a free, same-day consultation with one of our insolvency practitioners or arrange a meeting at one of our offices throughout the UK.

About The Author

Meet the Team

Julie is a law graduate who qualified with Price Waterhouse in 1994. Julie joined Smith & Williamson in 1997 and became a partner in 2001. With Mike Stevenson, Julie set up Middleton Partners offices in Salisbury and Southampton, both of which are now part of Begbies Traynor. Julie is a member of the Insolvency Practitioners Association and is a Fellow of The Association of Business Recovery Professionals. Julie deals with all aspects of Corporate Recovery and turnaround work and takes all form of personal insolvency appointments.

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