Are you a director who is considering closing a company? You’ll need to ensure that you are familiar with the processes involved and what’s expected of you. In this blog, we’re looking into the director conduct reporting service and what triggers an investigation.
Company closure for directors
One of the most common reasons why companies close is due to financial issues. A limited company in financial difficulty is often labelled insolvent. This means you cannot afford to pay company debts when they fall due, or your liabilities are worth more than your assets.
Directors of insolvent companies need to be proactive; otherwise, they may find themselves in trouble. As soon as you notice the limited company becoming insolvent, you should seek professional advice. Continuing to trade while insolvent can land you in trouble.
What is a director’s conduct report?
When a company enters formal liquidation, a director’s conduct report must be completed. An insolvency practitioner will complete the report for you in a CVL or administration. If you enter compulsory liquidation, it will be completed by the Official Receiver. As a director, you must cooperate and provide any requested documentation promptly.
There are many elements which need to be checked with a director’s conduct report.
Wrongful trading
Wrongful trading occurs when a director continues trading even though they know the company is becoming insolvent. This can have serious consequences as it shows that the director is not acting in the best interests of the company’s creditors or customers.
Misuse of company assets
Assets are anything that belongs to your company, which can include cash, stock, machinery or even property. Some directors may look into selling their assets at a lower value so they cannot be used within the liquidation. This is illegal and can land you in trouble. If directors decide to sell company assets, they must retain all relevant documentation and ensure that the assets have been valued by an independent company.
Failing to keep accurate records & poor financial management
Directors are required to maintain accurate records regarding the company, which include financial records. These records are essential for tax and debt purposes. Before filing for insolvent liquidation, you should ensure that there are no gaps in your financial records and that you have a good understanding of your company’s financial position.
Fraudulent actions found in the director conduct reporting
As a director, you are legally responsible for ensuring that business details are accurate and are not fabricated. Directors can face significant legal consequences for fraudulent trading or activity.
Not complying with the dates for company records
Businesses in the UK are required to file annual financial records to HMRC and Companies House. If you fail to meet these deadlines, you will face the consequences. It’s always better to be honest with these organisations, rather than bury your head in the sand.
What triggers a director’s investigation?
If wrongdoing is found in the director’s report, then your conduct will need to be investigated. Here are some of the reasons why further investigation can be triggered.
Complaints & reports
Even without insolvency, directors can find themselves facing an investigation. This would occur if the Insolvency Service receives a complaint or report of poor conduct. They will need to verify that you are adhering to your legal responsibilities and not engaging in any wrongful or fraudulent trading.
Insolvency & a director’s conduct report
Once a director’s conduct report has been completed, it is sent to the Insolvency Service. They will review the findings and may begin an official investigation. This information could also be assessed by the Official Receiver, who often begins compulsory liquidations.
If poor director conduct is found, then they will issue a formal letter to the director. This will outline the reasons for the misconduct and the next actions they plan to take.
What is a director’s investigation?
If your insolvency practitioner finds evidence of poor director conduct, they will need to pass the information on, and an investigation must be completed. Here is a simple step-by-step guide to a director’s investigation.
- The director’s conduct report is completed
- Evidence of misconduct is found
- The director is sent a questionnaire to say why the company has failed (in some cases)
- The director is invited to an interview to expand on the above
- The report is further scrutinised
- A decision is made and action is taken
What happens after a director’s investigation?
The exact action that is taken against company directors depends on the extent of their actions. If you are concerned about your own circumstances, then you should seek personalised advice from an insolvency specialist. Some of the consequences you may face include the following.
Personal liability for debts
Company directors may be found guilty of wrongful trading in relation to outstanding debts. If this is the case, they can often be held personally liable for the company’s debts. This can be highly stressful for directors to deal with, especially when they have already closed their company.
Fines & penalties
Some directors may face fines for their misconduct. This will be decided based on the extent of your actions and the guidance outlined in the Company Director Disqualification Act.
Director disqualification proceedings
Some company directors who have committed serious misconduct may find themselves disqualified from serving as a director. These disqualifications can last anywhere between 2 and 15 years. This can be extremely disheartening. Some directors may even face a prison sentence for failing to adhere to their legal duties and committing serious offences.
As a director, it’s really important that you follow your duties in insolvency. If you fail to act responsibly, you will face the consequences.
At 1st Business Rescue, we are committed to supporting directors with business closure and recovery. You can rely on us for trusted and confidential advice. Contact us today for personalised support. We hope this blog has been helpful on the director conduct reporting service and what triggers an investigation.
Justin Barker
I’m Justin Barker, the Managing Director at 1st Business Rescue. I have over 25 years of experience providing insolvency advice to business owners.
I understand how challenging it can be when dealing with financial difficulties within your business. It’s easy to ignore the problem and hope that it disappears, but this is often the worst thing you can do. Our dedicated team is here to provide honest, valuable advice to help UK directors deal with their personal situations in the most appropriate way.
No case or circumstance is the same, but I can guarantee that I am there to give you the best advice.
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