Posted by Dan Meadon-Bower, Partner
Investigating corporate insolvency – are you prepared?
We all saw the news last year about BHS and its sad demise. At the time, Business Secretary Sajid Javid ordered the Insolvency Service to fast-track its investigation of BHS and the circumstances which led to its insolvency. What lessons can companies look to learn from this retail giant?
The BHS investigation was extensive, with around 10% of the Insolvency Service’s investigatory capacity dedicated to looking into the case which led to the loss of 11,000 jobs and a £571m pension deficit.
The Insolvency Service investigated a range of issues, including the conduct of the directors leading up to and at the point of insolvency, whether the actions of any previous directors caused detriment to BHS’ creditors and the significance of any other occurrences of misconduct. The BHS case is a textbook example of when the Insolvency Service would investigate and report potential corporate abuse within a company, but are these the only type of circumstances where they have the power to step in?
Investigating insolvent companies
A civil servant within the Insolvency Service, known as the Official Receiver, will manage the first stages of company insolvencies. They are responsible for collecting and protecting assets used to satisfy creditors, looking into the reasons for the insolvency and act as a liquidator where no private sector insolvency practitioner has been appointed. They act on behalf of the Secretary of State under a number of laws, including the Insolvency Acts 1986 and 2000, the Company Directors Disqualification Act 1986 and the Companies Acts 1985 and 2006, in addition to a range of regulations relating to these acts.
Complaints against companies in compulsory liquidation are also dealt with by the Official Receiver, who will report any matters of concern to the Secretary of State. If there is sufficient reason to investigate and an investigation would be in the public interest, the Insolvency Service will step in. They have the power to investigate individuals that have controlled a company, regardless of whether or not they have been legally appointed as a director. If misconduct is found then proceedings to disqualify those responsible will commence, which can then prevent that person from directing a company for up to 15 years – details of the investigations are then published online.
Power to investigate any limited company
Perhaps lesser known is the Insolvency Service’s power to investigate limited companies where information is forwarded to them which suggests corporate abuse; for example serious misconduct, frauds, scams or ‘sharp practice’ in the way that a company operates. Legislation gives the Insolvency Service the power to investigate any limited company, so long as it is in the public interest to do so. As the investigations are confidential, the Insolvency Service has no obligation to inform the directors of the reasons as to why they are being investigated or who made the complaint. If it is found to be in the public interest, the Insolvency Service can issue warnings to the company, apply to the court to wind up the company and stop it trading, instigate proceedings to disqualify the directors from managing a limited company and disclose the information from the investigations to a prosecuting authority.
It is important to note that investigations conducted by the Insolvency Service are not limited to insolvent companies and even trading companies are open to investigation. Any findings of misconduct can have serious implications for a company and directors should be aware of the risks.
To talk to experienced solicitors who can help you minimise corporate insolvency risks, contact our Dispute Resolution team today.
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