Director investigations post Liquidation
Once liquidation is complete, and a company is fully closed down, its Directors will be subject to investigation to ensure they acted lawfully.
As a Director, what are my responsibilities?
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Only use your powers for the best interest of the company.
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Promote the success of the company.
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Exercise independent judgement.
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Exercise reasonable care, skill and diligence.
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Avoid conflicts of interest.
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Not accept benefits from third parties.
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Declare any personal interest in company transactions.
For a Company Director, a conflict of interest is when the interest of the Company is clashing with another personal interest of the Director. For example, if a Director enters into a contract (on behalf of the Company) with a supplier with whom he/she has a personal stake, this would be a conflict.
Generally, yes, all conflicts should be avoided. In certain situations a Company Director can seek approval to continue with a transaction or arrangement despite a conflict. The approval is sought from board members or shareholders.
Any Director must not favour a third party because of any benefits received. For example, if the Company has a contract advertised for tendering, the Director is not allowed to accept gifts or any form of hospitality from the tendering parties because it may influence the Directors’ decision.
What claims can be made against a Director?
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Fraudulent trading.
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Wrongful Trading.
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Misfeasance.
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Preferences.
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Transactions at undervalue.
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Extortionate credit transactions.
Fraudulent trading refers to Directors continuing business affairs with no intent to pay their debts. This form of claim can be difficult for the liquidator to obtain due to what is known as “the burden of proof.”
The burden of proof is when one party is ‘burdened’ with proving a said allegation against another party. In the context of Fraudulent Trading, the burden of proof lies with the insolvency practitioner i.e. the insolvency practitioner has to prove the Director committed fraud and the Director is, as the common expression goes, innocent until proven guilty.
They could be
- Held personally liable for paying company’s debts i.e. they have to pay it out of their own pockets.
- Be disqualified for a longer period of time.
- Be given a heavier fine.
- Sent to prison.
Similar punishments apply for Wrongful Trading (see below).
Wrongful trading refers to a business that continues to trade whilst being insolvent ie. unable to pay their debt as it falls due. This is usually a case of hoping that things will improve. The Insolvency Act states that this takes place “when a company’s directors continue to trade when:
- The directors knew or should have known there was no way of avoiding insolvent liquidation.
- The directors didn’t take every step to minimise the potential loss to the company’s creditors.”
The main difference is that Fraudulent Trading constitutes an intent to defraud Creditors and commit a crime, whereas Wrongful Trading is more around being incompetent or negligent and is therefore classified as a civil offence.
Misfeasance is defined as an act that is not illegal but unintentionally causes harm to another. In the case of insolvency, this can be misapplied money and/or assets. If a company’s directors have used money where they shouldn’t have, if they misapply or retain property, or breach trust when using company money, misfeasance can be applied.
- Taking a higher salary, when you know the Company is financially struggling.
- Hiding or removing a company asset so Creditors cannot liquidate it to reclaim debt.
A Director can be disqualified for up to 15 years and lose personal assets to compensate for any misfeasance.
Preferences occur when a specific creditor is placed in a more beneficial position and to the detriment of the remaining creditors. For example, repaying a loan to someone connected to the company is a form of preferential payment. Preferences include the transfer of assets as well as monetary payments.
Transactions at undervalue happens when a business asset is transferred or sold for either no money or at a price well below its true value. It is important as it can be seen as deliberately diverting assets away from creditors.
An extortionate credit transaction is a transaction where credit is provided on terms that are unfair compared to the risk accepted by the creditor. An example could be the purchase of a high cost liability while a company is becoming insolvent.
The Liquidator will:
- Interview the Directors and other staff as deemed appropriate.
- Assess the accounting records.
- Gather evidence from wherever possible i.e. through other stakeholders.
It’s in the best interest of the Director to be fully compliant and cooperate throughout an investigation. This means to reply to all requests and communication in good time and supply all information as necessary.
In the same way a Liquidator is gathering their evidence, a Director should also collect evidence to prove their innocence. In addition, they should find out why they are being investigated and have an explanation ready to justify throughout questioning and scrutiny.
The Director should seek their own independent advice via a licensed insolvency practitioner.
It all depends on what the Director is found guilty of. Punishments can include fines and Director Disqualifications.
What does it mean to be disqualified as a Director?
When a Director is disqualified they, for the length of the disqualification, are not allowed to:
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Set up, run or market another company.
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Become a Director elsewhere.
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Sit on the board for a charity, school or police authority.
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Be a pension trustee.
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Sit on a health board or social care body.
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Become an accountant, solicitor or barrister.
A Director would face up to two years of imprisonment.
The details of disqualification are publicly available on Companies House or on the Insolvency Service Register if a Director was disqualified by the latter.
You can be Director of company not registered in the UK, as long as they have no connections within the UK.
If you do want to be a Director of a UK based Company during the disqualification period, you can ask the Court for permission.