All directors of companies that are subject to Compulsory Liquidation are investigated by the Official Receiver appointed by the courts.
It can be a very stressful time, but knowing what to expect can reduce anxiety. We’ve put together a guide covering what the investigation focuses on and the potential consequences, disadvantages and penalties that directors may face, as a result.
What does the Official Receiver Check?
The Official Receiver is required by law to investigate the reasons for the failure of any company that goes into compulsory liquidation. They must also investigate the behaviour of the directors as part of this enquiry to see whether it contributed to the company’s difficulties and whether they breached their directors duties. The investigation and report extends to any person involved in the management of the company the Official Receivers deem appropriate, so it’s not just directors who can receive sanctions after the investigation.
It’s normal for the Official Receiver to request meetings with the directors as part of the liquidation process so the directors can provide a personal statement of their affairs.
The receiver can also require the directors to attend court for examination, but this is rare and only used in cases where they suspect serious misconduct or the directors refuse to comply with requests for information.
After they have conducted their investigation, the Official Receiver normally submits a report on the directors’ fitness to direct a company to the Secretary of State. This report covers any misconduct and the loss stemming from it, and any recommendations for sanctions and/or disqualification that are thought to be appropriate.
Checks into Directors’ Conduct
There are three key areas of focus that will be investigated
- Wrongful trading.
- The transaction at undervalue.
- Unfair reference.
Assessing Wrongful Trading
Wrongful trading occurs when a director of a company knew, or ought to have known, that a company was going to become insolvent and yet carries on trading, regardless.
If an Official Receiver reports that the director is guilty of wrongful trading, it is likely that the director will have to pay an amount (set by the courts or official receiver) to the insolvent company. The director can also be disqualified from the company for up to fifteen years and face other fines and penalties, including prison for the most serious misconduct.
The only defence to wrongful trading is the “every step” defence – where the director can show that he took every step possible to minimise the loss to the company’s creditors before the company’s insolvent liquidation.
Transaction at an Undervalue
A transaction at an will have occurred where a company sold any of its assets for an amount below their proper value. The Official Receiver can investigate any transactions that were made at an undervalue during the period of up to two years before the company going into liquidation.
If the directors are found to have made a transaction at an undervalue (or several), the official receiver can apply to the courts to reverse the sale. They can also order the directors to recompense the company so that it is in the same position it would have been had the transaction been for the asset’s full value.
The potential penalties for transactions at an undervalue are the same as for wrongful trading, so it is not something that should be taken at all lightly.
Unfair preference takes place if a company takes certain actions that put a creditor in a preferential position. A creditor will have been put in a preferential position if it is put into a better position than it would have been on the distribution of assets on a winding up of the company.
The action must have been intentional – mistakes by the company or its directors will not be unfair preference (though they may be deemed as wrongful trading or a transaction at an undervalue). However, if the creditor is a connected party to the company, the intention is presumed and can only be overcome by clear evidence to the contrary.
The potential penalties for unfair preference are the same as for the other two above.
If you are in the position where creditors, such as HMRC, are threatening to wind up your company, or your company is having severe financial difficulties, we are happy to talk you through your options as part of a no-obligation free of charge chat. Call us on 08000 746 757 or use the live chat on the bottom right-hand side of the screen.