The Top 12 Areas of Investigation in Insolvency Cases…

The Top 12 Areas of Investigation in Insolvency Cases…

Here is a summary of the main areas which a Liquidator or Administrator will review when considering the conduct of the directors of an insolvent Company…


    1.    Wrongful or Fraudulent Trading

Where a Company has continued to trade after becoming aware that it was insolvent, with the latter having been done with a specific intent to defraud creditors.  Particular importance here is given to what delaying tactics are used and the non-payment of crown liabilities (PAYE/NICs, VAT, Corporation Tax, CIS) in order to facilitate the continuation of trading.

2.    Preferences

Where one, or a number of creditors, are paid in priority to the remaining creditors.  Various things have to be proven for directors to be considered guilty of preferences but the penalty if proven is that either the beneficiary or the directors, have to repay the preference sums, and may also be fined, disqualified or imprisoned.

Directors should therefore take care to ensure that if they are struggling with cash flow, or suspect that they may be insolvent, then they should only pay only who they have to, and in the ordinary course of business (however some leeway is often given to directors if payment is made to the ones which shout the loudest).

3.    Transactions at Undervalue

The Disqualification Unit attaches particular importance to the attempted concealment of assets or cases where assets have disappeared or a deficiency is unexplained.  Therefore directors should always ensure that asset disposals are done at a full market price and that all transactions are completely transparent because like above, the beneficiaries or the directors personally can be brought to account for any loss to the estate.

4.    Customer Deposits

The taking of deposits for goods or services where it is highly likely that the Directors ought to have known that they could ultimately not be supplied is considered very poor conduct and therefore is given greater scrutiny.  If your business is one which regularly takes deposits for goods or services and you are considering an insolvency process, then you should ensure that you are completely confident that you can provide the product or service before agreeing to accept the deposit, otherwise you risk proceedings against you personally for wrongdoing.

5.    Bounced Cheques

Dishonoured cheques are regularly reviewed and easily evidenced when reporting on the conduct of the directors of an insolvent company and can even be used as an indication of when the company became insolvent.  Therefore no cheques should ever be issued unless they are certain to clear.

6.    Phoenix Abuse

This is when a director of an insolvent company sets up again using a same or similar name to that of the insolvent one (causing confusion with its creditors).  The penalty of being brought to account for Phoenix abuse is often the director having to take on personal liability of the company debts therefore this should be avoided at all costs.  The way to not fall foul of this is to either ensure that the new company (with the same or similar name) has already traded for 12 months before the old company goes into Liquidation or to purchase the name from the Liquidator and give notice to the creditors of the purchase.

7.    Money Laundering

The use of proceeds of crime and the laundering of money generally are high on the agenda for all professional bodies therefore the insolvency profession is no different.  The movement of cash and the director’s explanations as to the source of these is vital therefore good record keeping is a must here.

8.    Extortionate Credit Transactions

This is the Appropriation of assets to other companies for no consideration, at an undervalue, or on the basis of unreasonable charges for services so basically if directors have loaned money to their insolvent company for a higher than normal interest rate or charged an extortionate amount for a certain service then there is a high chance they may be pulled up.  Care should be taken to ensure that sufficient evidence and reasons are given to justify why those charges and transactions generally were necessary and to the benefit of the insolvent company.

9.    Personal benefits obtained by directors or shareholders

Quite simply, creditors do not want to see that directors and shareholders have not taken excessive wages, dividends and or repayments from an insolvent company when they have been left with not being paid.  Therefore directors should ensure that their wages are not excessive in relation to their turnover, that they only take out dividends when the company has made a profit (and therefore has the available reserves) and that any repayments are for the same basic sums as previous months/years (i.e. not increased).

10.  Any misconduct in relation to factoring or invoice discounting facilities

In particular this would usually be the duplication of invoices to obtain more credit and also the diverting of payment of debts away from the factoring account.  Any wrongdoing on a factoring account will be found therefore it is best to come clean on these at the outset and work with your factor to resolve any issues.

11.  Criminal Convictions and previous insolvencies

Whilst not an automatic cause for a poor conduct report, previous insolvencies are considered and in particular, whether the same issues were present.  Any known criminal convictions are also reviewed as they can give an indication of the areas that the directors may be likely to have fallen foul of.

12.  The over-valuation of assets in accounts for the purpose of obtaining loans, or other financial accommodation, or to mislead creditors

Assets are often much higher in the accounts that they are actually worth when sold on a forced sale basis however if assets are clearly higher than they should be then the directors are at risk and therefore a revaluation exercise should be undertaken.

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