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Insolvency Service Investigations and Prosecutions

Insolvency Service Investigation Lawyers

The insolvency of a company is often the trigger for disputes to occur. Financial claims can be made by Insolvency Practitioners, acting as either liquidators or administrators. They are concerned to collect in the assets of the insolvent company or make claims on its behalf. If criminality is alleged the matter may be referred to the Insolvency Service criminal enforcement team.

A liquidator or administrator will look at all of the company’s books and records and investigate the transactions of the company. The Insolvency Practitioner (IP) will also consider whether the conduct of the former directors was consistent with their obligations to act in the best interests of the company. 

Similarly, individual transactions will also be looked at. If in the period prior to insolvency company property was transferred away at less than its market value or certain creditors were paid at the expense of others.

The IP may also look at others involved with the company and ask whether a person acted as a shadow director – a person occupying the position of director, regardless of whether they are officially named as one”.

Finally, the Insolvency Practitioner will report to the Insolvency Service on the conduct of directors/shadow directors to determine whether any person ought to face a period of disqualification.   The IP will consider whether the conduct of the former directors potentially “unfit” for the purposes of the Director Disqualification Act 1986

Key areas of interest for the criminal enforcement team include;

  • Re-use of a company name
  • Offences of wrongful and fraudulent trading

Re-use of a company name

The Insolvency Act 1986 places certain prohibitions on the re-use of a company name following the insolvency of a company.

This is to avoid “phoenix” companies rising from the ashes of insolvency to the chargrin and losses of creditors.

Consequently, section 216 of the Insolvency Act 1986 imposes restrictions on the re-use of a company or trading name.

Directors face the risk of claims being made against them by liquidators for personal liability in respect of the debts of NewCo, and/or the prospect of the matter being investigated by the Insolvency Service criminal enforcement team.

The prohibition applies to any person who was a director or shadow director in the 12 months prior to the insolvent liquidation.

That person cannot then become a director or be concerned in the formation or management of a new company (“NewCo”). The prohibition lasts for a period of 5 years.

The re-use of the company name, in the absence of either filing the appropriate notice or receiving the permission of the Court, may amount to a criminal offence and can therefore arise at any point at which the name is re-used.

The personal liability, of the directors, for the debts of NewCo will often arise upon the insolvency of NewCo.

Claims can also be brought by creditors to NewCo independently of NewCo or their liquidators.

Wrongful and fraudulent trading

Wrongful trading, as a category of claims pursuable by an Insolvency Practitioner, is set out at section 214 of the Insolvency Act 1986. Essentially, the IP will be looking to see if the directors of a company allowed it to trade for too long at the expense of its creditors.

The liquidator will ask whether the director either knew or ought to have concluded that there was no prospect of the company avoiding insolvent liquidation.

If successful, the court has a wide discretion to declare that the person facing those proceedings has to make such contribution as the Court sees fit. In plain English this means the payment of money to the liquidator.

The director ought to try to show that every step was taken to avoid losses to creditors according to the ‘skill, knowledge and experience’ of the director concerned. The matter may be referred to the Insolvency Service criminal enforcement team if criminal behaviour is suspected.

The following are some of the warning signs that directors may be wrongfully trading:

  • Claims being issued and judgements in default
  • Poor credit rating
  • Dishonoured cheques
  • Trading in breach of bank overdraft
  • Unmet letters of demand
  • Directors looking for time to pay arrangements with third parties

Where it appears that the company was run with the intent to defraud creditors, the liquidator can ask the court to declare that the person being pursued is guilty of fraudulent trading.

A far more serious situation uncovered by a liquidator when investigating the trading of a company is fraudulent trading.

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