Liquidation investigations
If your company cannot pay its debts and you subsequently close it via an insolvent liquidation, the liquidator must perform an investigation into the actions and conduct of the directors as part of the process.
If you enter liquidation voluntarily via a Creditors’ Voluntary Liquidation, the investigation is conducted by the Insolvency Practitioner who is acting as the liquidator. If your company is forced into Compulsory Liquidation by a creditor, it’s the government’s version of an Insolvency Practitioner, the Official Receiver, who investigates.
Regardless of who conducts the investigation, they will want to determine the reasons for the company’s failure and to identify whether there was any wrongdoing on the behalf of the directors that contributed to its demise or worsened the position of the creditors.
The investigator can look back two to three years from the date of the liquidation when scrutinising different actions. They will investigate the conduct of all the directors who held office during that time, including any who have resigned.
They will examine company records, interview you and other directors and speak to employees or other third parties to identify evidence of misconduct, wrongful trading or fraud. Potential penalties include fines, being made personally liable for company debts, director disqualifications and even a custodial sentence.
Dissolved company investigations
If you dissolve rather than liquidate your limited company, you could face an investigation by the Insolvency Service. Unlike insolvent liquidations, where investigations are a mandatory part of the process, the Insolvency Service will only investigate a dissolved company if it receives complaints and other information about the conduct of the company or its directors.
It used to be the case that the Insolvency Service had to restore the dissolved company to the Companies House register before it could investigate, but now it can begin an investigation straightaway.
It will look for signs of negligence, unfit conduct and suspected wrongdoing. That can include things like:
- Not submitting tax returns or paying money owed to HMRC
- Not running the company properly
- Not keeping or producing appropriate accounting records
- Fraudulent behaviour
The Insolvency Service will look closely at companies they suspect of using the Voluntary Dissolution process (also known as Company Strike Off) to avoid paying staff wages, debts to suppliers and Bounce Back Loans. They will also investigate suspected examples of ‘phoenixing’ – where directors dissolve a company with debts and go on to set up a new company that carries on the same business.
The potential penalties include being disqualified from acting as a company director for up to 15 years, and, in the worst cases, criminal prosecution.
Don’t Fall Foul of Unqualified AdviceHMRC investigations
HMRC also has the power to investigate a company if it believes the business was dissolved with outstanding tax liabilities. HMRC can launch an investigation up to six years from the date of dissolution, but that can stretch to 20 years where the failure to pay tax results from fraud or negligence.
Before it can investigate, HMRC must apply to the court to reinstate the dissolved company to the Companies Register. It can then launch a full investigation into the conduct of the directors and their management of the company.
As part of its investigation, HMRC will search for evidence that directors deliberately dissolved the company to avoid paying their tax debts. They will also look for examples of fraudulent transactions, improper financial management and preferential payments that lead to the nonpayment of tax debts.
If the HMRC investigators find a company’s failure to pay taxes was due to neglect or fraud, it can issue a Personal Liability Notice to make the directors personally liable for the outstanding debt. The directors can also be fined, disqualified from acting as a director, and even imprisoned in the most serious cases of fraud.
How to avoid investigations when closing a company
Based on this information, you may feel that closing a limited company is fraught with risk, but that’s not a fair reflection of the process. The truth is that financial and legal penalties resulting from investigations are rare.
Although your conduct will be investigated if you enter an insolvent liquidation, you can greatly reduce the risks by contacting a licensed Insolvency Practitioner early and following their recommendations. And, although there can be an investigation if you Strike Off or liquidate a solvent company, it’s very unlikely if you use the appropriate closure method and meet your legal obligations.
Are you worried about investigations when closing your company?
If you are worried about the prospect of liquidation, dissolved company or HMRC investigations, please contact our experienced team of licensed Insolvency Practitioners. We will help you navigate the closure process, regardless of your company’s financial position, and mitigate the risks.
Find out more about your company closure options and get in touch for a free consultation or arrange a meeting at one of our offices throughout the UK.
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