Companies Act 1985 – Section 447 Investigations
So, what is Section 447 Investigation ?
The investigation is carried out by the insolvency service’s criminal enforcement Team. This happens when the directors are least expecting it and with no warning. It can have a significant impact on the director’s business, personal financial circumstances, your work life balance and family .
The Secretary of State ( SoS ) has far-reaching powers to investigate and interrogate company directors under section 447. The law is as follows:-
‘447 Power to require documents and information:
- The Secretary of State may give directions to the company requiring it –
- to produce such documents (or documents of such description) as may be specified in the directions;
- to provide such information (or information of such description) as may be so specified.
(5) A requirement under subsection (2) or (3) must be complied with at such time and place as may be specified in the directions or by the investigator (as the case may be).
(7) The Secretary of State or the investigator (as the case may be) may take copies of or extracts from a document produced in pursuance of this section.’
The law also gives the person investigating with the same powers!
The goal of the SoS’s is
‘Regarding insolvency related fraud and associated corporate misconduct, working to deter fraud in companies by investigating and prosecuting breaches of insolvency and company law.’
To eradicate fraud and misconduct. Most company investigations are carried out under section 447. The department for Business, Energy and Industrial Strategy (‘BEIS’) via the Insolvency Service Criminal Enforcement Team, initiate Section 447 Investigations.
What type of cases are investigated?
A suspicion of fraud, misfeasance, misconduct, fraudulent trading, theft or that the company is involved in an illegal pyramid selling scheme. There are other matters here to look at too, but these are the main topics we come across.
Who makes the complaints?
The complains can be from various sources – the Police, Trading Standards and members of the public. It is unlikely that the Investigator will disclose the source or nature of the complaints that lead to the Section 447 Investigation.
The knock on the Company Front Door – WITHOUT NOTICE
The Insolvency Service’s powers under section 447 are administrative, in the sense that they are not encumbered by the rules of natural justice in relation to, for example, advance warning.
However, a notice given under section 447 must not be excessively wide or in unreasonable terms and those giving the notice must have acted fairly. As a matter of administrative law, the Secretary of State must have good reason for acting. Section 447 Investigations are not commenced lightly.
How long will the investigation last?
The Secretary of State aims to complete section 447 enquiries within an average of 90 days. That time is often exceeded depending on the circumstances of the case.
What can be investigated and sought?
An Investigator may give Directions to the company requiring it to produce such documents as the Investigator may specify or provide such information as the Investigator may specify (section 447(3)).
A requirement to produce documents or information must be complied with at such time and place as may be specified in the Directions or by the Investigator (section 447(5)) or within such further time as may be agreed. Extended time for compliance by the company can be and is often agreed by negotiation.
There are serious consequences of failing to comply with such a Direction.
If the company refuses to co-operate, the Investigator can obtain a Search Warrant and attend at the premises with the Police to search for and seize documents.
The Secretary of State or the Investigator is entitled to take copies of or extracts from a document produced (section 447(7)) and, for this purpose, a document includes information recorded in any form (section 447(8)).
Consequences from a Section 447 Investigation
Consequences may flow not only for the investigated company but also for the Directors of the company, personally. The Secretary of State could potentially for example act on produced documents and information by deciding to present a Winding-Up Petition against the company on the public interest ground that it is just and equitable to wind-up the company, under section 124A(1) of the Insolvency Act 1986. In an appropriate case, a provisional Liquidator may also be appointed to the company.
Less serious sanctions can be agreed or imposed by negotiation.
Director Disqualification
Another example, information or documents obtained under section 447 could and do form the basis for a decision by the Secretary of State to apply for a Disqualification Order against the company’s Directors in the Public Interest, on the grounds that the Directors have engaged in ‘unfit conduct’.
Such consequential action can be and often is opposed by the company and its directors. That however can be a legally expensive road to follow, albeit one that must be followed out of practical necessity. The objective of the client and the appointed legal team must be to prevent matters reaching that stage.
Criminal Proceedings
It is also possible for information disclosed in a Section 447 Investigation to be deployed in criminal proceedings against individuals involved in the company under investigation.
Any statement made by a person who complies with a requirement under section 447 of the Companies Act 1985 may be used in evidence against him (section 447A(1)). However, in criminal proceedings in which that person is charged with a relevant offence, no evidence relating to the statement may generally be adduced by or on behalf of the prosecution and nor may a question relating to it be asked by or on behalf of the prosecution unless evidence relating to it is adduced or a question relating to it is asked in the proceedings by or on behalf of that person (section 447A(2)).
Reputational Damage
These investigations are civil , not criminal and are very confidential. They are conducted in a way that doesn’t prejudice the business of the company. However, the Investigator can make contact with suppliers and customers of the company if need be. Employees and former employees may also be contacted for further information. There are steps that can be taken to minimise the need for such contact and to thus protect the company.
Non-compliance by the Director
There are serious penalties for failure to comply with requests for information during a Section 447 Investigation. Where there has been a failure to comply with a section 447 request, an Inspector, the Secretary of State or an Investigator may certify this fact in writing to a Court (section 453C(2)). If this happens, the Director and the company is in potentially very deep and dangerous water.
The consequences of non-compliance
If (after hearing any witnesses and any statement offered in defence) the Court is satisfied that that the offender failed without reasonable excuse to comply, it may deal with him as if he had been guilty of a Contempt of Court (section 453C(3)). Potential penalties for the company and/or a defaulting Director thus include a fine or imprisonment.
Consequences for the Director if the investigated company goes into Liquidation
Consequences may include a Director Disqualification investigation for the Director and also consequential financial recovery action from the Liquidator against the Director, to include the setting aside of improper antecedent transactions in the relevant period prior to liquidation or even a prosecution for Fraudulent trading.
If a company were to be wound-up on the just and equitable/public policy ground referred to above, under Insolvency Act 1986 section 124A(1), there would be a high likelihood of a Director disqualification investigation and Director Disqualification proceedings following against one or more of the Directors.
It is important to note that a Section 447 Investigation can have very serious consequences indeed, for both the company and its Directors.
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