Director Conduct Investigation
When a Scottish company enters insolvent liquidation, directors often worry that the liquidator will “investigate” them and assume this means they are suspected of wrongdoing.
That is not the starting position.
The conduct of directors is considered as part of the normal insolvency process. That does not mean that misconduct is presumed or that every director will face a formal investigation by the Insolvency Service.
The liquidator will review the company’s affairs and submit information about director conduct. The Insolvency Service then decides whether there is sufficient reason and public interest to investigate further.
If you are concerned about particular transactions, tax arrears, company records, Bounce Back Loans, drawings or decisions made before liquidation, it is usually better to understand those issues before the company enters insolvency.
Are all directors investigated after a company goes into liquidation?
All directors of companies entering formal insolvency are subject to the statutory director conduct reporting process.
That is different from saying that every director becomes the subject of a formal misconduct investigation.
After an insolvent company enters liquidation, the office-holder must submit a director conduct report to the Insolvency Service.
The report provides information about the company and its directors and allows the Insolvency Service to consider whether any director’s conduct warrants further investigation.
Where no significant concerns are identified, there may be no further action against the director.
For many directors of genuinely failed businesses, this reporting process therefore takes place in the background without leading to disqualification proceedings.
Who submits the director conduct report?
The office-holder dealing with the insolvent company submits the report.
In a Creditors’ Voluntary Liquidation, that will normally be the liquidator.
Current Insolvency Service guidance states that the report must be submitted within three months of the company entering formal insolvency proceedings.
The report is made to the Insolvency Service acting on behalf of the Secretary of State for Business and Trade.
The fact that a report is submitted is therefore entirely normal and should not itself be interpreted as an allegation against the directors.
What does a liquidator look at?
The circumstances vary from company to company, but a liquidator will normally need to understand how the business was operated and why it became insolvent.
Matters that may require consideration include:
- The company’s accounting and financial records
- The reasons for the company’s failure
- When financial difficulties became apparent
- How directors responded to those difficulties
- Payments to directors and connected parties
- Director’s loan accounts
- Dividends and other distributions
- Transfers or sales of company assets
- Payments to selected creditors
- HMRC arrears and the company’s tax history
- Company borrowing, including Bounce Back Loans where relevant
- The use of company money and assets
- Whether adequate company records were maintained
- Whether directors co-operated with the liquidator
A transaction being reviewed does not automatically mean it was improper. The liquidator needs to establish the facts before reaching conclusions.
What types of conduct can cause concern?
There is no single complete list of conduct that can lead to director disqualification.
Official guidance gives examples including:
- Allowing a company to continue trading when it cannot pay its debts in circumstances where this causes concern
- Failing to maintain proper company accounting records
- Failing to submit required company accounts and returns
- Serious or persistent failure to deal with company tax liabilities
- Using company money or assets for personal benefit
- Removing assets that should have been available to creditors
- Fraudulent behaviour
- Failure to manage the company properly
- Failure to co-operate with an insolvency practitioner or official receiver
Context matters. A company owing HMRC money, making losses or ultimately failing does not itself prove that its directors are unfit.
The question is how the directors managed the company and responded to its circumstances.
Does continuing to trade while insolvent automatically mean misconduct?
No.
Insolvency and misconduct are not the same thing.
A company may experience temporary financial difficulty while directors genuinely believe that a refinancing, asset sale, new contract, restructuring or other event will allow the business to recover.
What becomes important is whether that belief was reasonable and whether directors continued to monitor the position and consider creditors’ interests.
Concerns are more likely where a company continues incurring substantial new liabilities when there is no realistic means of paying them and no credible prospect of avoiding insolvent liquidation.
Directors who recognise that the company is in serious financial difficulty should therefore obtain advice rather than simply allowing the position to continue indefinitely.
Will HMRC debt result in a director conduct investigation?
Not automatically.
Many insolvent companies owe VAT, PAYE, Corporation Tax or other amounts to HMRC.
The existence of a tax liability does not itself establish misconduct.
However, the history of the company’s tax position may be relevant, particularly where there has been:
- A prolonged build-up of substantial tax arrears
- Repeated failure to pay current taxes while continuing to trade
- Failure to submit tax returns
- Previous company failures leaving significant tax debts
- Evidence that directors knew liabilities were increasing without a realistic repayment strategy
- Other behaviour suggesting unfair treatment of HMRC or creditors generally
The circumstances and evidence need to be considered as a whole rather than simply looking at the final amount owed to HMRC.
What about an overdrawn director’s loan account?
An overdrawn director’s loan account is not, by itself, proof of misconduct.
Director’s loan accounts are common in owner-managed companies.
The liquidator will normally establish how the balance arose and consider recovery because money owed by a director is potentially an asset of the company.
The circumstances can become more relevant to conduct where, for example, substantial money continued to be withdrawn when the company was already in serious financial difficulty or company funds were deliberately diverted for personal benefit.
It is therefore useful to separate two questions:
- Do I owe money to the company?
- Do the circumstances in which the money was withdrawn raise a separate conduct issue?
What about dividends paid before liquidation?
Dividends may be reviewed where a company enters liquidation.
Relevant questions can include:
- Whether sufficient distributable profits existed
- What financial information was available when dividends were declared
- Whether appropriate dividend documentation exists
- Whether payments were genuinely dividends or simply drawings
- Whether directors continued extracting substantial funds as the company’s financial position deteriorated
An accounting or dividend issue does not automatically lead to director disqualification. The underlying facts and the director’s conduct need to be considered.
Are Bounce Back Loans investigated?
Where a company has an outstanding Bounce Back Loan, the borrowing and use of the funds may form part of the review of the company’s affairs.
That does not mean every unpaid Bounce Back Loan is suspicious.
A company may have borrowed legitimately, used the funds properly and later failed.
Greater concern may arise where there are issues such as:
- False information in the application
- Materially overstated turnover
- Multiple loans obtained improperly
- Use of funds for personal purposes
- Other evidence that the scheme was deliberately abused
What happens if the Insolvency Service decides to investigate?
If a formal investigation is opened, the Insolvency Service will normally write to the director.
The initial letter will identify areas of concern and ask the director for comments.
The Insolvency Service may then ask further questions as its investigation progresses.
Directors are entitled to provide explanations and evidence for consideration.
That evidence might include:
- Company accounts and management information
- Board minutes
- Cash-flow forecasts
- Emails and correspondence
- Advice received from accountants or other professionals
- Bank records
- Tax correspondence
- Evidence relating to financing or refinancing attempts
- Contracts or proposed business transactions
- Documents explaining why particular decisions were taken
The director’s explanation can therefore be an important part of the investigation rather than the process simply relying on information supplied by the liquidator.
Should I respond to an Insolvency Service investigation?
Yes.
Current Insolvency Service guidance specifically states that it is in a director’s interests to respond.
If you do not provide your explanation or evidence, decisions may have to be made using information obtained from other sources.
That does not mean you should respond hastily to a serious allegation without understanding it.
Read the correspondence carefully, identify exactly what is being alleged or questioned, gather the supporting documents and obtain appropriate professional or legal advice where the issues are significant.
What can happen after an Insolvency Service investigation?
There are broadly two possible directions.
No further action
If the Insolvency Service decides that no further action is required, the investigation is closed and the director is informed.
Disqualification is considered
If the investigation concludes that disqualification may be appropriate, the director will be provided with details of the alleged misconduct and given further opportunity to provide information.
The case is then reviewed before a final decision is made on whether there is sufficient evidence and whether bringing disqualification proceedings is in the public interest.
Where proceedings are proposed, the director receives further detailed correspondence setting out the allegations, evidence and proposed disqualification period.
How long can a director be disqualified for?
For an unfit director of an insolvent company, the statutory disqualification period is between 2 and 15 years.
A director may be disqualified by:
- A disqualification order made by the court; or
- A disqualification undertaking accepted without the need for a contested court hearing
Disqualification is a serious restriction. During the period of disqualification, a person cannot normally act as a company director or be involved in the promotion, formation or management of a company without permission of the court.
The seriousness of the conduct affects the length of any proposed disqualification.
Can I be ordered to pay money as well as being disqualified?
Potentially.
Director disqualification and financial claims are separate issues.
A liquidator may pursue a director for money through claims such as:
- Recovery of an overdrawn director’s loan account
- Recovery of company property
- Misfeasance or breach of duty claims
- Claims concerning particular pre-insolvency transactions
- Wrongful or fraudulent trading claims where the statutory requirements are satisfied
Separately, compensation provisions can apply in some director disqualification cases where misconduct has caused identifiable loss to creditors.
This means that a director should not assume that the Insolvency Service deciding not to pursue disqualification necessarily resolves every financial issue involving the liquidator, or vice versa.
Does the director conduct process apply in Scotland?
Yes.
The Company Directors Disqualification Act 1986 applies in Scotland as well as England and Wales.
There are important differences between Scottish and English corporate insolvency procedure, but director disqualification and Insolvency Service conduct investigations operate under the wider Great Britain framework.
A director of a Scottish company entering liquidation should therefore expect the director conduct reporting process to form part of the insolvency in the same way as directors elsewhere in Great Britain.
What should I do before liquidation if I am worried about my conduct?
Do not try to alter the company’s history.
Instead, establish the facts and preserve the evidence.
Useful steps include:
- Preserve accounting and company records
- Do not delete emails or electronic files
- Ensure company bookkeeping is brought reasonably up to date where possible
- Identify significant payments and transactions
- Reconcile director’s loan accounts
- Gather dividend documentation
- Retain evidence of professional advice received
- Keep records of refinancing or rescue attempts
- Identify the reasons important decisions were made
- Tell your insolvency adviser about any issue that particularly concerns you
Trying to hide or retrospectively alter transactions is likely to create greater concern than openly explaining something that happened for legitimate commercial reasons.
Should I delay liquidation because I am worried about an investigation?
Usually that is the wrong way to approach the decision.
If a company is insolvent and cannot realistically recover, continuing to trade simply to postpone scrutiny can worsen the company’s position and increase creditor losses.
Liquidation does not create historic transactions or conduct. It brings the company’s affairs into a formal process where they can be reviewed.
If you are worried about something that has already happened, discuss it openly before the liquidation so that you understand the likely implications.
Can I become a director again after my company is liquidated?
Normally, yes.
A company entering insolvent liquidation does not itself disqualify its directors.
You can normally act as a director of another company unless a legal restriction applies, such as a disqualification order or undertaking.
Separate rules also restrict the reuse of the same or a similar company name following insolvent liquidation, so advice may be needed where you intend to continue a similar business.
Director Conduct Investigation FAQs
Does every liquidator report directors?
The statutory conduct reporting process applies to directors of companies entering formal insolvency. The report does not mean that the director is accused of misconduct.
How soon is the conduct report made?
Current Insolvency Service guidance states that the office-holder must submit the director conduct report within three months of the company entering formal insolvency proceedings.
Will I see the liquidator’s conduct report?
The important practical point is that if the Insolvency Service decides to open an investigation, it will contact you and give you an opportunity to comment on the areas being investigated.
Does an investigation mean I will be disqualified?
No. An investigation may be closed without further action. Disqualification is only pursued where the evidence and public-interest tests support doing so.
How long can disqualification last?
For an unfit director of an insolvent company, a disqualification order or undertaking can last between 2 and 15 years.
Does company failure mean I was an unfit director?
No. Businesses fail for many legitimate commercial reasons. The relevant issue is the director’s conduct, not simply the fact that the company became insolvent.
Can an overdrawn DLA lead to disqualification?
An overdrawn director’s loan account does not automatically mean misconduct. The amount and circumstances surrounding the withdrawals may nevertheless form part of the wider conduct review.
Does owing HMRC money lead to disqualification?
Not automatically. The tax history may be relevant, particularly where arrears built up persistently while the company continued trading, but the overall circumstances and director conduct have to be considered.
Should I get legal advice if the Insolvency Service writes to me?
If the correspondence raises serious allegations, proposes disqualification or involves a substantial financial claim, independent legal advice may be appropriate. Do not ignore the correspondence or allow important response deadlines to pass.
Worried about what a liquidator may find?
If your company is approaching liquidation and you are concerned about particular decisions, transactions or payments, you do not need to wait until somebody raises them afterwards.
We can discuss the company’s history with you, identify issues likely to require explanation and distinguish normal business failure from matters that may need more detailed consideration.
Where a director needs independent legal advice about their personal position, we will explain when that becomes appropriate.