Insolvency Investigations Explained: Process, Risks & What UK Directors Should Expect

The Preliminary Information Questionnaire arrives two weeks after the liquidator’s appointment.

It asks about bank statements, the director’s loan account, any payments to connected parties in the final six months, and what you did with the Bounce Back Loan. The tone is polite. The deadline is 21 days.

If you are the director of a company that has entered liquidation or administration, an insolvency investigation is not a hypothetical.

It is a statutory process that begins the moment the office-holder is appointed, and the report on your conduct is normally due at the Insolvency Service within three months of the insolvency date under section 7A of the Company Directors Disqualification Act 1986.

This guide covers the law in England and Wales. Scotland and Northern Ireland have their own rules.

We act for directors through this process. The directors who come out well are not always the ones with the cleanest companies.

They are the ones who engaged early, produced documents without being chased, and told the IP what went wrong before the IP had to infer it from bank statements.

What Insolvency Investigations Actually Cover

An insolvency investigation is a structured examination of the last two to three years of a company’s trading, run by the office-holder (the Official Receiver in compulsory liquidations, a licensed insolvency practitioner in creditors’ voluntary liquidations and administrations).

The IP or Official Receiver reviews the company’s books, director’s loan account, management accounts, bank statements, payments to connected parties, dividend history, and the use of any government-backed lending such as Bounce Back Loans or CBILS.

They also review filed accounts at Companies House against what the bank statements actually show.

The output is a director conduct report filed with the Insolvency Service under section 7A CDDA 1986 within three months of the insolvency date, unless the Secretary of State allows longer.

That report goes through the Insolvency Service’s case sifting. A minority of cases move forward to formal investigation, disqualification proceedings under section 6 or 8, or a compensation order under section 15A or 15B CDDA.

For wider context, our guide to director disqualification sets out the range of outcomes.

How Insolvency Investigations Are Conducted

The first stage is document gathering. The IP takes possession of company records under section 234 IA 1986, directors must give the IP information under section 235, and the IP can ask the court to order production of records under section 236.

In practice, the Xero or QuickBooks login, the last eighteen months of bank statements, the payroll reports, and the board minutes are where the IP starts.

The second stage is the questionnaire. Directors receive a Preliminary Information Questionnaire. It is not sworn, but the law requires you to give the office-holder the information they reasonably need. You must complete it.

The questions seem neutral; they are not.

A question about whether you took dividends in the last year is really a question about whether those dividends were lawful under section 830 Companies Act 2006 (distributable profits) and section 847 (recovery of unlawful dividends).

The third stage is the interview. Most directors are interviewed by phone or video, with a note taken.

Office-holders can ask the court to examine you privately under section 236 IA 1986. In a compulsory liquidation, and in serious cases, the Official Receiver can apply for a Public Examination in open court under section 133.

Unlike a police interview, you cannot refuse to answer without a reasonable excuse. The protection against self-incrimination is narrow, and the transcript is admissible in later civil proceedings.

What the IP Looks For in an Insolvent Company

In our work on these files, the patterns that surface again and again are the ones directors expected would stay buried. Bank statements do not forget.

Misfeasance under section 212 IA 1986: breaches of duty or misapplication of company money.

Classic examples are personal expenditure run through the company card without repayment, salary paid while accounts were overdrawn with no Board authority, or assets transferred to a new entity without consideration.

Wrongful trading under section 214 IA 1986: continuing to trade past the point when you knew, or ought to have concluded, there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration.

The test is objective (what a reasonably diligent person doing your job would know) plus subjective (your own knowledge, skill and experience, if greater). Taking new customer deposits in the final month is usually where this bites.

Preferences under section 239 IA 1986: putting one creditor in a better position than the others in the six months before the insolvency began (two years if the creditor is connected), when the company could not pay its debts or could not pay them as a result.

Paying down the director’s own loan account, clearing a family loan, or granting security for an existing debt are the common red flags. The leading authority is Re M.C. Bacon Ltd [1990] BCC 78, which set the “desire to prefer” test.

Transactions at undervalue under section 238 IA 1986: selling the company van to a connected buyer for half its market value, or transferring goodwill to a new company for no payment. The lookback is two years.

Bounce Back Loan misuse: the Insolvency Service has prioritised BBL cases since 2021.

Using a £50,000 BBL to clear the director’s loan account, or to buy a personal car, produces both a preference claim and a misfeasance claim, and in serious cases a Proceeds of Crime Act referral.

Conduct Reports and Investigations by the Insolvency Service

Under section 7A CDDA 1986, the office-holder must file a conduct report within three months of the insolvency date, unless the Secretary of State allows longer.

The report goes through the Director Conduct Reporting Service, which runs an algorithmic sift to flag cases for further scrutiny by the Insolvent Targeting Team.

A minority of cases are “sifted in” for formal investigation.

From there, the Secretary of State may seek a disqualification order (or accept a disqualification undertaking) under section 6 CDDA (unfit conduct) for 2 to 15 years, or under section 8 CDDA (public interest).

Disqualification bands run 2 to 5 years (lower bracket), 6 to 10 (middle), and 11 to 15 (top, for particularly serious cases, such as deliberate phoenix schemes, BBL fraud or a repeat disqualification).

Since 2015, section 15A CDDA 1986 lets the Secretary of State apply for a compensation order against a disqualified director where specific creditors have suffered identifiable loss.

Compensation orders are pursued alongside disqualification, not instead of it, and they make the director personally pay an amount to the Secretary of State for the benefit of named creditors, or into the company’s assets.

The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 extended these powers so that a director of a dissolved company can be investigated and disqualified without the company being formally put into liquidation.

Dissolution is not an exit.

Civil and Criminal Consequences for Directors of an Insolvent Company

Civil exposure runs in three tracks. A personal judgement under section 212, 213, 214, 238, or 239 IA 1986 is enforceable against your assets. A disqualification order stops you acting as a director for up to 15 years, unless the court gives you permission.

A compensation order under section 15A makes you pay an amount for the benefit of specified creditors, a class of creditors, or the company’s assets.

Joint Liability Notices under the Finance Act 2020 are HMRC’s route.

If HMRC considers that you were responsible for, or knowingly benefited from, tax avoidance or evasion by the company, or that you have been involved in a run of insolvent companies that left tax unpaid, an HMRC officer can issue a JLN making you jointly and severally liable for the company’s tax debts.

JLNs can be reviewed and appealed. HMRC does not have to prove fraud, but insolvency alone is not enough: the notice needs tax avoidance or evasion, a repeat pattern of insolvent companies leaving tax unpaid, or a penalty for facilitating avoidance or evasion.

Criminal exposure is narrower but not absent. Fraudulent trading under section 213 IA 1986 (civil) and section 993 Companies Act 2006 (criminal) covers trading with intent to defraud creditors.

BBL fraud is usually prosecuted under the Fraud Act 2006 and the Proceeds of Crime Act 2002, with cases brought by the Insolvency Service or the police.

The size of the loss matters, but the division between civil and criminal tracks turns mainly on evidence of intent. An overdrawn director’s loan account that was never repaid looks like misfeasance.

An overdrawn director’s loan account accompanied by false invoices to a connected company looks like fraud.

Wrongful vs Fraudulent Trading Distinction

Wrongful trading (section 214 IA 1986) is a civil breach.

The liquidator must prove, on the balance of probabilities, that you knew or ought to have concluded there was no reasonable prospect of avoiding insolvent liquidation or insolvent administration. You then have a defence if you show you took every step you ought to have taken to minimise the loss to creditors from that point.

The remedy is a contribution order: the court can order you to pay into the estate whatever it thinks proper, usually measured by how much worse creditors were left because trading continued past that point.

BTI 2014 LLC v Sequana SA [2022] UKSC 25 confirmed that the creditor duty under section 172(3) Companies Act 2006 engages earlier than many directors assume.

Fraudulent trading is different in kind. Section 213 IA 1986 (civil) and section 993 Companies Act 2006 (criminal) require intent to defraud creditors or some other fraudulent purpose. The criminal standard is beyond reasonable doubt, with a maximum sentence of 10 years.

Fraudulent trading is rare in prosecution terms, but the civil route is common where conduct goes beyond poor judgement into active concealment.

A common director mistake is assuming that because they did not intend to defraud anyone, wrongful trading cannot apply. It can. Wrongful trading has no dishonesty element.

It asks whether you kept trading past the point of no return and whether that cost creditors money.

What Directors Should Do When Insolvency Investigations Start

Engage early.

The director who produces the Xero export, the bank statements, and a narrative explaining what went wrong is treated differently from the director who gives monosyllabic answers and “cannot recall.” Cooperation is explicitly weighed in the conduct report.

Do not destroy records. Deliberately destroying books and papers in the 12 months before a liquidation, or after it starts, is an offence under section 206 IA 1986 and is one of the fastest routes to a 10 to 15 year disqualification band.

If records are genuinely lost (a laptop failure, a retired accountant), say so on the record.

Get independent advice. The appointed IP is not your adviser. Their statutory duty is to creditors and the estate.

Where a transaction might trigger a misfeasance or preference claim, you need your own licensed insolvency practitioner or solicitor, separate from the office-holder.

We regularly act in that separated capacity. For fuller detail, see our pages on wrongful trading and misfeasance claims.

Your Next Step

There are two groups of directors reading this. The first are directors whose company traded until cash ran out, whose records are in order, whose DLA is reconciled, and whose BBL went on payroll and rent.

For that group, the investigation is an administrative process. You will complete the questionnaire, you will have one call with the IP, and the conduct report will be neutral. You do not need us.

The second group are directors who paid a connected creditor in the last six months, whose BBL use does not match the bank statements, who took dividends when the accounts were technically in deficit, or whose records are incomplete.

For that group, the investigation is live. The difference between disqualification for 3 years and disqualification for 9 years is usually how the first interview goes. Preparation matters more than anything that follows it.

If you are in the second group, call us on 0800 074 6757 before your first PIQ response. Our team includes licensed IPs who have been on both sides of this process.

The first 45 minutes with us is free and confidential; what we tell you in that call will change what you write in the questionnaire.

FAQs About Insolvency Investigations