If you’re involved in a bankruptcy or winding up process, you will hear the term ‘Official Receiver’.

Below, we define this important role and explain how they work.

What is the Official Receiver?

Official Receivers act as officers of the government agency, the Insolvency Service. They are appointed when a company is put into compulsory liquidation – as when petitioned by a creditor and then wound up by the court – or an individual is declared bankrupt. The service is provided around the UK from local offices of the Insolvency Service. an executive agency of the Department for Business, Energy and Industrial Strategy (BEIS). 

Responsibilities

The Official Receiver – and their team of staff – will manage at least the first stage of insolvencies – sometimes known as the provisional stage. There are a number of duties, which include:       

  • To collect and protect assets for creditors
  • To take control of the company’s affairs
  • To investigate – and report on – the reasons for the insolvency 
  • To keep creditors and shareholders updated

Official Receiver vs Liquidator

The Official Receiver acts as liquidator where there is no private sector insolvency practitioner appointed.

While the Official Receiver will be involved initially with a liquidation, when it comes to the realisation of assets, a private sector insolvency practitioner will often be appointed for this role, subject to the approval of creditors. In the case of large or highly complex cases, the Official Receiver may also bring in additional experts to assist with the liquidation. 

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

  1. Wrongful trading.
  2. The transaction at undervalue.
  3. 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

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.

Investigation into the Conduct of Directors

The Official Receiver will  interview the company’s directors and go through the financial records. They may also make background enquiries with other parties, such as banks and the company’s accountants. The Official Receiver’s reports on cases are not publicly available.

If fraud or other wrongdoing appears likely, the Official Receive will report this to the Insolvency Service’s Investigations and Enforcement Services. The Official Receiver has wide ranging powers to obtain information that will support their investigations and can also examine people in court if necessary. Where there may be criminality, the Official Receiver may also deal with other agencies such as local police or the Serious Fraud Office.

Directors’ Duties

Directors have a duty to comply with requests from the Official Receiver to provide information about the company’s financial affairs and management and also to attend interviews when asked. The Official Receiver is not able to provide directors with legal or financial advice.

Initial meetings will usually be held in person and can last several hours. Questions will be around what assets are held, debts and the reasons for why insolvency has occurred. Following this, the Official Receiver will write to directors, setting out what is required from them.

It is essential that directors cooperate with the Official Receiver’s office and if not, they could be summoned to court to answer questions or even arrested. Furthermore, directors who do not cooperate could be sanctioned by being disqualified from future company management roles for a period of from two to 15 years.

How Soon Will Directors Hear From the Official Receiver? 

Employees from the local office of the Official Receiver will generally be in contact within two working days of receiving the insolvency order, if not before. Directors will usually be asked to attend an interview within 10 days of the order.

Once investigations are underway and sufficient information is collated, the Official Receiver will set out details of the assets and debts in a report for creditors. This will normally be issued within eight weeks of the insolvency order being granted. A meeting of creditors will usually be held within 12 weeks of the winding up order