Director Conduct Review: Common Mistakes to Avoid

A director conduct review, as we call it here, is an investigation into a director by the Insolvency Service (the Service), the government body that decides whether to pursue directors.

It starts when the Service decides that the liquidator’s report on a director, or something else it has learned, deserves a closer look. Much of it is done in writing: a letter setting out what concerns the Service, an invitation to reply, and sometimes an interview.

The liquidator must report on every director of a company in insolvent liquidation, but not every director is investigated. A letter from HMRC about unpaid tax is not part of this process. The investigation is the stage where your reply can change the outcome, so take advice before you answer the first letter.

If no letter has arrived yet, the earlier stage is explained in our guide to the director’s conduct report, which every liquidator must send in a creditors’ voluntary liquidation or any other insolvent liquidation.

The Quick Answer for Directors

Each stage below can end the matter, and you are told when an investigation closes. Proceedings for a disqualification order must normally start within three years of the company becoming insolvent, and later only with the court’s permission.

Why the Insolvency Service Opens a Conduct Review

The Service is deciding whether disqualifying a director is in the public interest.

It judges conduct against the matters in Schedule 1 to the Company Directors Disqualification Act 1986: how far the director was responsible for the insolvency or for any material breach of the law, any misfeasance (misusing company money or property) or breach of duty, how often it happened, and the loss caused.

In practice those matters lead the Service to facts that sit in the bank statements and the filing history:

• trading on after insolvency became probable, taking credit or deposits the company could not honour;
• paying directors, family or connected companies while HMRC and suppliers went unpaid;
• selling assets below their value, especially to a connected company;
• missing or incomplete records, which leave the liquidator unable to reconstruct what happened;
• repeatedly failing to file returns or to pay over PAYE and VAT;
• not cooperating with the liquidator.

None of these needs dishonesty. Unfitness can rest on serious incompetence or neglect, so a director who never took a penny improperly can still be investigated for how the company was run.

The liquidator’s report is not the only source. The Service also reviews any other information it receives, so a clean report does not rule out an investigation, and a critical one does not make it certain.

What Happens When an Investigation Starts

The first sign is a letter. The Insolvency Service writes to the director setting out its initial areas of concern and inviting comments, which is the director’s first chance to put the record straight.

Investigators can then write again, ask for documents, interview you, and make enquiries of creditors, suppliers, employees and others connected with the company. How long it takes depends on how complex the case is and how much cooperation the Service gets.

If the Service decides no further action is needed, it closes the case and tells you. If it recommends disqualification or compensation, it sends a summary of the alleged misconduct and the next steps, and you can send further information before anything is decided.

How to Respond to a Conduct Review Letter

1. Read the whole letter and note the reply date. If you cannot meet it, ask for more time in writing before it passes.
2. Take advice before replying. A solicitor who handles disqualification cases, or an insolvency practitioner who is not the company’s liquidator, can tell you which concerns are serious and which can be answered with documents.
3. Answer each concern with evidence. Board minutes, cash forecasts, correspondence with HMRC and notes of advice taken show what the directors knew and why they acted. General assurances do not.
4. Give the context, and show it. An accountant who failed to file, or payments made under a realistic rescue plan, are relevant, but only with the paperwork behind them.
5. Keep copies of everything you send and receive, and a dated note of every call.
6. Keep cooperating with the liquidator, who is a separate office-holder with separate claims.

The replies that carry weight show a decision trail: what the board knew at each point, what advice it took, and what it did to limit creditors’ losses. That is also the hardest thing to rebuild once the records have gone, which is why we ask directors for the minutes and forecasts before anything else.

Disqualification Undertakings vs Court Orders

If the Service decides to act, it can apply to court for a disqualification order or accept a disqualification undertaking instead. Both last between 2 and 15 years, and both appear on the public register of disqualified directors.

An undertaking avoids a hearing, and the period on offer may reflect that saving. The price is the right to contest the allegations. An undertaking is a disqualification.

While either runs, you cannot act as a director or take part in managing a company without the court’s permission. Breaching it is a criminal offence, with penalties up to two years in prison, and it makes you personally liable for debts incurred while you were involved.

Get advice on both the allegations and the length before signing. Once accepted, an undertaking can be changed only by applying to court. Our guide to directors’ disqualification covers the restrictions in detail, and the risk of being disqualified goes further.

Compensation Orders and Other Claims Against Directors

Since 2015, a court can also order a disqualified director to pay compensation, or the director can agree a compensation undertaking, where their conduct caused loss to creditors.

The liquidator’s own claims, such as wrongful trading or misfeasance, run separately, so a closed investigation does not end them. Our guide on whether directors are personally liable for company debts covers those routes.

Where the Service finds possible crime, such as fraud or the destruction of records, it can pass the case to its own criminal investigators or to another law enforcement body.

Common Mistakes to Avoid in a Conduct Review

Leaving the first letter unanswered. It is an invitation to explain, and a missed deadline leaves the Service deciding on what it already has.

Replying from memory. A reply that cannot be matched to minutes, forecasts or emails reads as reconstruction. Gather the documents first, then write.

Treating an undertaking as the soft option. It carries the same ban, the same register entry and the same criminal penalties for breach as a court order.

Assuming old decisions are out of reach. The three-year window decides who is reported on, not how far back conduct can go. Conduct from any point in the company’s life can be described if it is relevant.

Blaming the liquidator. The liquidator writes the report. The Insolvency Service decides whether to investigate and whether to seek a disqualification, so arguing with the liquidator about the outcome is aimed at the wrong person.

Resigning to step away. A former director is still covered if they served in the three years before the liquidation began. Our guide to resigning before liquidation explains why.

If a letter from the Insolvency Service has arrived, or you expect one, and we are not the company’s liquidator, we can go through the records with you and explain which concerns may need answering. Book a free, confidential consultation with our licensed insolvency practitioners.

Frequently Asked Questions

Related Guides

Each of these goes deeper on one part of the process.

• What happens to directors in liquidation
• The director’s conduct report in liquidation
• Directors’ disqualification
• Are directors personally liable for company debts?
• Resigning before liquidation