Deerstalker, pipe, cape … and a liquidator
Michael J M Reid · Posted on: July 18th 2024 · read
When a company is subject to insolvent liquidation, the liquidator is required by legislation to undertake suitable and appropriate enquiries into a director’s activities. This is enshrined in the Insolvency Act 1986 and other supporting compliance standards such as Statements of Insolvency Practice “SIP” (of which there are currently 16 in place).
In an insolvent liquidation setting, it is fairly normal for a director to describe his activities in the best possible light in order to limit the risk of falling foul of the law. The liquidator will consider what he is told and what he can assess from the information available before reaching a view on whether a director’s conduct has been responsible, and what may need to be done to recover assets for the benefit of the general body of creditors. Such tasks are not necessarily mutually exclusive.
When a director finds himself in difficulty with a liquidator’s enquiries, it is strongly recommended that specialist advice is sought as soon as possible. If you don’t like the line of enquiry or would rather not answer questions, that will not stop the liquidator undertaking his duties and perhaps reaching a conclusion that is not conducive to your best interests.
SIP 2 sets out various tasks that a liquidator is required to follow. Typically, the first step is to ask a director to complete a statement of the company’s financial affairs, and to complete a questionnaire containing numerous questions for which the liquidator wishes to know the answer.
Part of the sleuthing exercise is to uplift / review the company’s accounting records and on the basis that virtually every company uses some sort of electronic means to maintain accounting records, it is difficult these days to claim that there are no accounting records because “the dog ate them”.
If a director finds himself pursued by a liquidator for explanations, money, assets or company records, it should always be noted that ignorance of the relative law is no excuse.
When a company fails, there are several stakeholder groups who will have a differing view on why the situation occurred and when it becomes clear that there may be little or no financial return, former employees, trade creditors, HMRC, other directors, shareholders and customers will often provide information to a liquidator on a wholly confidential basis which will assist enquiries i.e. not be supportive of a former company director. Corporate failure can lead to some unwelcome consequences and there are many offences which a liquidator might consider a director guilty of regarding the failed company.
Perhaps the most common is wrongful trading i.e. a director continuing to allow a company to trade when he knew, or ought to have known, that the company had no realistic prospect of avoiding insolvent liquidation. A director (or shadow director), can find himself personally liable for company debts which were incurred after the date trading should have ceased.
Fraudulent trading is another area upon which the liquidator will focus attention. That said, successful prosecutions against a director for conducting fraud in anticipation of a winding-up, or creating transactions which defraud creditors, tend to be relatively infrequent because, as one might anticipate, they are difficult to prove in court.
Local readers may remember the media coverage of Alistair Greig who was sentenced to prison for fraudulently obtaining over £13 million from unsuspecting investors where he persuaded 165 victims to invest in guaranteed high-interest accounts which did not exist. Falsification of company records and destroying/mutilating company documents are often easier to prove and can create a criminal record for the director involved.
Frequently, creditors will advise the liquidator that false representations were made to them about the company’s inability to settle debts. When this occurs, the liquidator will provide a detailed questionnaire to creditors in order to help focus thinking/enquiries because it is important to separate a general moan about losing money from demonstrating inappropriate actions.
Misapplication of company assets is another area for investigation e.g. a director paying himself to the detriment of creditors, or perhaps selling company assets to either himself or a connected party at much less than fair value. Again, the requirements of SIP 2 will require the liquidator to look at these closely.
The legislation applies to all companies in liquidation, irrespective of size. Thus, even the director of a one-man entity needs to be alert to the requirement to behave properly and in the interests of all stakeholder groups such that the principal purpose of promoting the success of the company is followed.
Being a director can provide spectacular rewards, but if the finances are not under control and formal insolvency proceedings incept, there are many traps for the unwary as the liquidator undertakes his investigations. You can never be too careful.
Restructuring & Recovery
Read more about Restructuring & RecoveryRead moreAs you might anticipate, the best advice is to retain all documentation, not just formal minutes, because one never knows when this will be called upon to validate a director’s actions.
