When a company becomes insolvent, there are many things for directors to deal with. Alongside concerns about employees, creditors and the future of the business, you may also be worried about what the insolvency means for you personally.
One area that can cause particular concern is the prospect of your conduct as a director being investigated by the Insolvency Service.
However, an investigation does not automatically mean that you have done something wrong – and company failure alone does not necessarily mean that a director will be disqualified. The Insolvency Service itself acknowledges that director misconduct is only one of many reasons why companies fail.
That said, if the Insolvency Service does decide to investigate your conduct, it is important to understand what is happening, engage with the process and seek professional advice at an early stage.
Here, we explain why directors of insolvent companies may be investigated, what the Insolvency Service could look at and what happens next.
Why might the director of an insolvent company be investigated?
When a company enters formal insolvency proceedings, the appointed office-holder – such as an administrator or liquidator – is required to submit a director conduct report to the Insolvency Service within three months.
The Insolvency Service, acting on behalf of the Secretary of State, then considers the information provided and decides whether it is in the public interest to investigate further, with a view to determining whether director disqualification may be appropriate.
This reporting requirement is a normal part of the insolvency process. It does not mean that every director of an insolvent company is suspected of wrongdoing or that every report will result in an investigation.
In fact, businesses become insolvent for all sorts of reasons. Rising costs, the loss of an important customer, economic disruption, bad debts and unexpected changes in a company's market can all contribute to financial distress.
The important question is how directors acted, particularly as the company's financial position deteriorated.
Throughout an insolvency, directors should therefore cooperate with the office-holder, provide the information requested and ensure that their contact details remain up to date.
What could the Insolvency Service investigate?
There is a wide range of conduct that could potentially lead to further investigation.
According to the Insolvency Service, this can include conduct intended to deprive creditors of assets, neglect of the company's tax affairs, failure to follow relevant rules, fraudulent trading and failing to act in the best interests of the company and/or its creditors.
More broadly, government guidance gives examples of potentially 'unfit conduct', including allowing a company to continue trading when it cannot pay its debts, failing to keep proper accounting records, failing to submit accounts and returns, failing to pay company tax and using company money or assets for personal benefit.
The circumstances of every company are different, though. An investigation is about examining the facts and evidence surrounding what happened rather than simply assuming that the directors are responsible because a business has failed.
That is an important distinction if you receive a letter from the Insolvency Service: being investigated is not the same as being disqualified.
What happens if the Insolvency Service opens an investigation?
If the Insolvency Service decides to open a civil investigation, it will write to you outlining its initial areas of concern and invite you to respond.
Receiving such a letter can understandably be worrying, but ignoring it is unlikely to help.
The Insolvency Service specifically states that it is in a director's best interests to respond. If you don't, investigators will have to make their decision using information obtained from other sources. By responding, you have an opportunity to provide explanations, evidence and context that may be important to understanding the decisions you made.
Depending on the issues being considered, this might mean explaining the commercial circumstances facing the company at a particular point in time or providing supporting records and correspondence.
The Insolvency Service may come back to you with further questions or requests for information during its investigation. You can also provide additional information at any stage.
This is one reason why keeping comprehensive, accurate company records – and documenting significant decisions when a business is in financial distress – is so important.
What can happen after an investigation?
There isn't one inevitable outcome - once the Insolvency Service has considered the evidence, there are several possible next steps.
1. The investigation is closed
If the Insolvency Service concludes that no further action is required, the case will be closed and you will be informed.
For directors worried that the existence of an investigation means disqualification is inevitable, this is worth emphasising: an investigation can end without further action.
2. Disqualification or compensation is recommended
If the investigation concludes that disqualification or compensation should be pursued, you will receive a summary of the alleged misconduct and information explaining what happens next. You will again have an opportunity to submit information you believe should be considered.
Where the Insolvency Service intends to pursue disqualification, a director may ultimately either contest the allegations through court proceedings or offer a disqualification undertaking, which is a voluntary agreement to be disqualified that brings the court action to an end.
Given the potential consequences, obtaining appropriate professional and legal advice before deciding how to respond is important.
3. Information is passed to another organisation
In some cases, an investigation may identify concerns that are more appropriately dealt with by another criminal or civil law-enforcement organisation.
The Insolvency Service can therefore pass information to another body with the relevant powers.
Its separate guidance explains that its insolvent-company civil investigators do not themselves conduct criminal investigations. Where potential criminal offences or regulatory breaches are identified, information can instead be referred to the appropriate investigation team, police, regulator or another agency.
What does director disqualification mean?
The potential consequences of disqualification are significant, which is why an investigation needs to be taken seriously.
Where misconduct is established, a director can be disqualified for between two and 15 years. During the period of disqualification, you cannot act as a company director or become involved in the promotion, formation or management of a company unless you have permission from the court.
Breaching a disqualification can have further serious consequences. Government guidance states that doing so could result in prosecution and personal liability for company debts.
Disqualification can therefore affect not only your current position but your future business activities, making it particularly important to seek advice as soon as concerns arise.
What should you do if your conduct is being investigated?
First and foremost, don't panic – but don't ignore the situation either.
If you have received correspondence from the Insolvency Service, read carefully what is being alleged and what information you have been asked to provide. Make a note of any deadlines and start gathering the relevant company records and evidence.
Avoid providing a rushed response simply because you want the matter dealt with quickly. Equally, failing to engage means the Insolvency Service may have to reach its conclusions without the benefit of your explanation.
It is also sensible to seek professional advice.
The circumstances surrounding an insolvent company can be complicated. Decisions that make sense when viewed in the commercial context in which they were made may require careful explanation months or even years later. Having expert support from a licensed insolvency practitioner can help you understand the issues being raised and establish what records and information may be relevant.
Most importantly, if your company is currently experiencing financial difficulties but has not yet entered insolvency, don't wait for matters to deteriorate before asking for help.
Early insolvency advice can help you understand the company's financial position, your duties as a director and the options available to protect creditors and, where possible, rescue the underlying business.
How McAlister & Co can help
Facing an Insolvency Service investigation can feel daunting, particularly when you are already dealing with the consequences of a company becoming insolvent.
However, receiving an investigation letter doesn't mean that the outcome has already been decided. What matters is understanding the concerns that have been raised, engaging properly with the process and making sure that the relevant facts and circumstances are clearly established.
At McAlister & Co, our experienced insolvency team understands the pressures directors face when a business gets into financial difficulty.
If your company is struggling, we can help you understand the options available before matters escalate, from restructuring and business rescue solutions through to formal insolvency procedures where necessary. We can also help directors understand what to expect from the insolvency process and their responsibilities throughout it.
The sooner you seek advice, the more opportunity there usually is to assess your options and determine the most appropriate way forward.
If you are concerned about your company's financial position or what insolvency could mean for you as a director, contact McAlister & Co today for confidential, practical advice about your next steps.