Insolvency Service investigations
into trading companies

The Insolvency Service describes itself as the government agency that provides public services to those affected by financial distress or failure. It's core purpose is to deliver economic confidence by supporting those in financial distress, tackling financial wrongdoing and maximising returns to creditors. In order to achieve that purpose, the Insolvency Service utilises its investigation and enforcement powers to tackle financial or other misconduct.
 

This article considers the Insolvency Service’s key investigatory powers in respect of companies that are still trading. The Insolvency Service also has powers to investigate companies that have entered into insolvency proceedings (administration, administrative receivership, voluntary and compulsory liquidation), and their directors, which are not considered.

Commencement of an investigation

The Insolvency Service has wide powers to investigate companies that are still trading where it suspects financial or other misconduct, often acting following complaints from members of the public, such as customers, investors and other creditors. Such investigations are conducted by a part of the Insolvency Service known as Company Investigations.

Section 432(2) of the Companies Act 1985 provides that the Insolvency Service may commence an investigation if it appears to the Secretary of State that there are circumstances suggesting one or more of the following:

• That the company's affairs are being or have been conducted with intent to defraud its creditors or the creditors of any other person, or otherwise for a fraudulent or unlawful purpose, or in a manner which is unfairly prejudicial to some part of its members;
• That any actual or proposed act or omission of the company, including an act or omission on its behalf, is or would be so prejudicial, or that the company was formed for any fraudulent or unlawful purpose; or
• That persons concerned with the company's formation or the management of its affairs have in connection with it been guilty of fraud, misfeasance or other misconduct towards it or towards its members; or
• That the company's members have not been given all the information with respect to its affairs which they might reasonably expect.

An investigation may also be commenced following an application by the company itself or its shareholders (section 431). Such applications need to be supported by evidence showing that there are good reasons for requiring the investigation. An investigation may also be commenced following a declaration by a court that a company’s affairs ought to be investigated (section 432(1)).

In many cases, companies and their directors will not know the reason for the appointment of investigators. While the Secretary of State must exercise the powers of appointment in good faith, there is no requirement to disclose the reasons for the commencement of an investigation or any of the material which was considered in making such a decision.

Powers of investigation

Section 434(1) provides that specific duties apply to all past and present officers and agents of a company under investigation, including the company’s bankers, solicitors and auditors. Those specific duties are:

• To produce to the inspectors all documents of or relating to the company which are in their custody or power;
• To attend before the inspectors when required to do so; and
• Otherwise to give the inspectors all assistance in connection with the investigation which they are reasonably able to give.

Section 434 also provide inspectors with wide ranging powers to compel any person (not only officers and agents of the company) to produce relevant documents, to attend before them for an interview/meeting, and otherwise to give assistance in connection with the investigation. 

The consequences for failing to comply with such duties and requirements can be severe. If a person fails to produce documents when required, refuses to attend an interview, refuses to answer any question put to him by the inspectors or otherwise fails to assist the inspectors, the inspectors may certify that fact in writing to the court. The court may then inquire into the case and after hearing any statement which may be offered in defence, may punish the person as if he/she had been guilty of contempt of the court.

Protections relating to the use of information obtained by compulsion

Where a person is compelled to answer questions pursuant to the above powers, subject to limited exceptions, no evidence relating to the answer may be adduced, and no question relating to it may be asked, by or on behalf of the prosecution in criminal proceedings against that person (section 434(5A)). This reflects the right to remain silent and the privilege against self-incrimination, which are both internationally recognised requirements of a fair procedure under Article 6 of the European Convention on Human Rights.

This is an important protection, not least as the statutory criteria for opening an investigation includes circumstances of fraud, misfeasance or other unlawful actions. Therefore, in many cases an investigation by the Insolvency Service will concern matters which would usually be (or may subsequently be) investigated by the police, the Serious Fraud Office or another prosecuting or regulatory body.

However, it is important to note that such protection does not extend to civil proceedings, in which such evidence is generally admissible. Similarly, evidence obtained under compulsory powers may be used in disqualification proceedings. Finally, no such protection extends to pre-existing documents which are required to be produced to investigators. Such documents will be capable of being disclosed to prosecuting bodies and potentially admissible in criminal proceedings, without infringing a person’s Article 6 rights.

Potential outcomes

There are a number of possible outcomes of an investigation.

1. The investigation may show there is no cause for concern, so no action will be taken against the company or any other persons.
2. In cases which do not merit formal action being taken, the Insolvency Service can give a company and its directors a warning and ask them to improve their conduct.
3. In serious cases, if it appears to be in the public interest, the Insolvency Service can apply to the court to wind up the company and stop it trading.
4. Where the Insolvency Service has concerns about the actions of directors, it may instigate proceedings to disqualify them from managing a company for a period up to 15 years.
5. The Insolvency Service’s Criminal Enforcement Team may investigate and prosecute breaches of insolvency and company law, primarily under the Companies Act 1985, Companies Act 2006, Insolvency Act 1986 and Company Directors Disqualification Act 1986. Offences which are typically investigated and prosecuted by the Insolvency Service include fraudulent trading; failing to keep accounting records; destroying, mutilating or falsifying company records; and acting as a director when disqualified.
6. The information obtained by the Insolvency Service and its findings can be disclosed to a prosecuting authority to prosecute the company or its directors or it can be passed to another regulatory body (e.g. the Financial Conduct Authority or the Competition and Markets Authority) that has more appropriate powers to deal with any concerns the investigation uncovers.

Trends in enforcement

On 1 January 2017, the Department for Business, Energy and Industrial Strategy’s (BEIS) Criminal Enforcement Team transferred to the Insolvency Service. The Insolvency Service’s Criminal Enforcement Team is the lead criminal enforcement agency for insolvency related fraud and corporate misconduct, prosecuting cases referred by other teams within the Insolvency Service, by Companies House and other agencies.

In 2018-19, the Insolvency Service instituted criminal proceedings against 144 individuals and disqualified 1,242 directors, with 8.9% of those individuals being disqualified for 10 years or more. The Insolvency Service’s Annual Plan for 2019-2020 makes clear that it considers its investigation and enforcement activities to be fundamental in giving individuals and companies the confidence to conduct business. We therefore expect to see a continued increase in the number of Insolvency Service investigations opened in the coming year, as more businesses face challenging trading conditions. 

While many companies and their directors will have taken some comfort from the Business Secretary’s announcement on 28 March 2020 that the government intends to suspend wrongful trading provisions, we expect the Insolvency Service to continue to take a close interest in the affairs of trading companies over the challenging months ahead. While the government no doubt wishes to provide companies with some headroom to enable their survival, the Insolvency Service will be alive to the risk of abuse by companies and directors, to the detriment of creditors.

In those circumstances, and given the volatile and challenging trading conditions at present, companies and directors will need to continue giving careful consideration to the duties they owe to their creditors, not only to their shareholders. Companies and directors should continue to seek legal and other professional advice and carefully evaluate and document their decisions, so as to be in the best possible position to respond to any enquiries from the Insolvency Service or related litigation.

FURTHER INFORMATION

For further information on the issues raised in this blog post, please contact a member of our criminal team.

ABOUT THE AUTHOR

Phil Salvesen is an associate in the criminal litigation team who specialises in advising individuals and corporates in relation to criminal and regulatory issues. His cases frequently involve serious allegations such as fraud, market abuse, insider dealing, money laundering, false accounting, bribery and corruption, electoral offences and anti-competitive behaviour.

Phil maintains a general crime practice and also advises on contentious regulatory issues in a range of other sectors, including matters involving the Financial Reporting Council (FRC), Institute of Chartered Accountants in England and Wales (ICAEW), Gambling Commission and CFA Institute.