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 first report on your conduct is due at the Insolvency Service within three months under section 7A of the Company Directors Disqualification Act 1986.
We act for directors through this process. In our caseload, the directors who come out well are not 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 appointment.
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 235 IA 1986 and can compel production 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 that is, in effect, a sworn statement. 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.
Official Receivers have statutory power to conduct formal examinations under section 236 IA 1986 and, in serious cases, a Public Examination in open court under section 133.
Unlike a police interview, you cannot refuse to answer. 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 known, there was no reasonable prospect of avoiding insolvent liquidation.
The test is objective (a reasonably diligent director with your experience) plus subjective (your actual knowledge). Taking new customer deposits in the final month is usually where this bites.
Preferences under section 239 IA 1986: paying one creditor ahead of others in the six months before insolvency (two years if the creditor is connected).
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 appointment.
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, reserved for deliberate misconduct such as phoenix schemes and BBL fraud).
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 create a personal debt enforceable by the creditor named in the order.
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.
A compensation order under section 15A creates a creditor-specific debt.
Joint Liability Notices under the Finance Act 2020 are HMRC’s route.
If the Insolvency Service concludes that a director has used insolvency to avoid tax, HMRC can issue a JLN making the director personally liable for the company’s VAT, PAYE, NIC, and Corporation Tax debt.
JLNs are appealable, but the threshold is insolvency-related conduct rather than fraud.
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 referrals to the National Investigation Service for loans above £25,000 and to local police economic crime units for smaller amounts.
The division between civil and criminal tracks is rarely about the size of the loss. It is about documentary 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 known there was no reasonable prospect of avoiding insolvent liquidation, and that you did not take every step to minimise loss to creditors thereafter.
The remedy is a contribution order: you pay into the estate the amount creditors lost 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. 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.
In our caseload, the most 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. Deliberate destruction of books and papers 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
Can I be investigated if my company has been dissolved?
Yes. The Rating (Coronavirus) and Directors Disqualification (Dissolved Companies) Act 2021 gives the Insolvency Service power to investigate and disqualify directors of dissolved companies without any formal insolvency process. Strike-off is not an escape route.
What happens if I refuse to cooperate with the IP?
Non-cooperation is itself evidence of unfit conduct. The office-holder can apply for a private examination under section 236 IA 1986 or a public examination under section 133. In practice, persistent refusal lifts the disqualification band and invites a costs order. Cooperation is cheaper.
How long does an insolvency investigation usually last?
The section 7A conduct report is filed within three months of appointment. Where the case is sifted in for formal disqualification proceedings, the timeline extends to 12 to 24 months from appointment, with a statutory 3-year long-stop under section 7(2) CDDA 1986 for starting proceedings.
Can I be a shadow director and still face the same consequences?
Yes. Section 251 IA 1986 defines a shadow director as a person in accordance with whose directions the registered directors are accustomed to act. Shadow directors face the same wrongful trading, preference, and disqualification risks as appointed directors. The label on Companies House is not the point; the documentary pattern of control is.
Will misusing a Bounce Back Loan lead to prosecution?
BBL misuse is actively pursued. The civil route is disqualification plus a compensation order. Where the loan application itself was fraudulent (overstated turnover, fictitious trading history), the file is referred to NATIS or local police for Fraud Act 2006 or Proceeds of Crime Act 2002 proceedings. The criminal threshold is evidential, not monetary.
If I resign before insolvency, am I protected?
No. Liability attaches to conduct during your tenure. Resigning two weeks before a liquidator is appointed does not unpick a preference made three months earlier or a dividend paid last year. Resignation is relevant only to conduct after the resignation date.
What is the difference between a Compensation Order and a Joint Liability Notice?
A compensation order under section 15A CDDA 1986 is granted by a court alongside disqualification and is payable to named creditors or the general body of creditors. A Joint Liability Notice under the Finance Act 2020 is an HMRC administrative measure making the director jointly liable for specific tax debts. Different statute, different procedure, same end.
