Insolvent Company Investigations

Reviewed by

Christopher Andersen

Reviewed by Christopher Andersen

Chris is an Insolvency Practitioner regulated by the ICAEW since 2014,. He is experienced in contentious insolvency with excellent analytical skills and strong knowledge of both general and technical insolvency matters.

Meet Our Experts

26th April 2024

What is an Insolvency Investigation

An insolvency investigation is an examination conducted by an authorised insolvency practitioner or official receiver into the affairs and conduct of an insolvent company or individual.

The main purposes of an insolvency investigation are:

1. To ascertain the reasons for the insolvency and identify any misconduct or unfit behaviour by directors/management that contributed to the company’s failure.
2. To examine the company’s books, records, transactions, and asset disposals in the period leading up to insolvency.
3. To investigate potential claims or recoverable assets that could be pursued to benefit creditors.
4. To determine if directors violated any duties or committed offences such as fraudulent trading, wrongful trading, transactions at undervalue, or personal benefit from company assets.
5. To scrutinise the validity and propriety of transactions with related parties or directors.
6. To assess the general conduct of directors and whether they should be disqualified from acting as directors in the future.

Insolvency Service Investigations Into the Conduct of Directors

If serious unfit conduct or fraud by directors is uncovered during the insolvency investigation, the matter may be referred to the Insolvency Service, which is part of the Department for Business, Innovation and Skills.

Under Section 432 of the Companies Act 1985, the Secretary of State has the power to appoint inspectors to carry out an official investigation if the court requests it. The grounds that can warrant such an investigation include:

1. An intention to defraud the company’s creditors or for other fraudulent purposes.
2. Evidence of unfairly prejudicial conduct against the company or its members.
3. Findings that the company’s management/directors have been guilty of fraud, misfeasance, or other misconduct towards the company or its members.

Inspectors have extensive powers to obtain books, records, information and explanations from officers, employees, agents and others connected to the company.

Such investigations aim to examine and establish any responsibilities of directors for the company’s insolvency and whether they failed to fulfil their duties properly. Culpable directors may face disqualification proceedings or, in the most serious cases of fraud or improper conduct, potential criminal prosecution.

Search Warrants

The Insolvency Act 1986 (the Act) grants the Insolvency Service the power to obtain search warrants under Section 448. This allows them to search premises for documents if they have reasonable grounds to believe:

• Documents are not being produced: An investigator has requested documents on the premises, but they haven’t been provided.
• Evidence of a crime: An offence punishable by imprisonment of at least two years has been committed, and there’s documentation on the premises related to the crime.
• Tampering with evidence: If documents were requested, there’s a risk they might be removed, hidden, tampered with, or destroyed.

Disclosure

Section 447 of the Act empowers the Secretary of State or an authorised investigator to issue a direction requiring a company or any other person to produce relevant documents or information.

This power extends beyond company directors. The Insolvency Service can compel anyone connected with the company, such as employees, suppliers, or even independent contractors, to produce necessary information.

Interviews

Company investigators can also gather information through interviews. They may interview:

• Company directors and senior management
• Employees
• Other individuals connected to the company, such as auditors, suppliers, or customers (depending on the investigation)

The Insolvency Service website provides more detailed information about their investigations and enforcement work: https://www.gov.uk/government/collections/insolvency-service-investigations-and-enforcement-what-we-do-our-outcomes-and-complaints

>>Read our full article on the directors conduct report

Criminal Investigations

It’s important to note that the Insolvency Service’s company investigators do not have powers to conduct criminal investigations themselves.

However, if during the course of their investigation, it appears that the company or its officers may have committed criminal offences or other regulatory breaches, the case can be referred to other appropriate authorities. These include:

• The Criminal Enforcement Team within the Insolvency Service itself
• The Police
• Relevant regulatory bodies like the Financial Conduct Authority
• Other law enforcement or investigative agencies

It is then up to that separate body to determine if a criminal investigation is warranted based on the evidence provided by the Insolvency Service investigators.

Need Guidance on Navigating Insolvency Investigations? We’re Here to Help

If you’re facing the prospect of insolvency and are concerned about the implications for your company and your role as a director, it’s crucial to seek professional advice early. At Company Debt, our team of experienced insolvency practitioners is here to offer the support and guidance you need during these challenging times.