Introduction

In May 2022, there were a total of 1,817 company insolvencies in England and Wales. Overall company insolvencies in May 2022 were 34% higher when compared to May 2019 (pre-pandemic) and 79% higher than insolvencies recorded in May 2021.

More insolvencies means more directors being issued director questionnaires from liquidators or administrators asking them to explain their prior conduct.

However, the questionnaire is just one stage of the process which looks back at the events leading up to insolvency. This article explores the questionnaire stage as well as the other stages which directors should be aware of.

Why director questionnaires are sent out

The Insolvency Service is on the front line to investigate director misconduct. The Service has civil powers by law to investigate and act concerning the conduct of directors that have entered into formal insolvency procedures (most common being administration and liquidation) or which have been dissolved.

This can relate to conduct, both before and after the relevant insolvency process. Although complaints can come from any source, the Insolvency Service gets most information from the director conduct reports which are submitted by insolvency officials. Insolvency officials are required to gather information on misconduct or fraud and examples can include: 

  • Trading while insolvent.
  • Deliberate deception.
  • Acting fraudulently.
  • Not keeping proper accounts.

They will gather such evidence by sending out questionnaires to all current directors (and those in office over the last two years in the run up to insolvency). Directors can receive questionnaires which range from 30 to 70 questions long.

They tend to start quite gently (name; address; role in the company; qualifications etc.) before the “beartraps” start appearing:

  • When, and in what circumstances, did you first become aware that the company was insolvent?
  • If applicable, why was trading continued after that date and who was responsible for it?
  • What debts were incurred after the company became insolvent?
  • What steps did you personally take when you became aware of the insolvency of the company?
  • Can you confirm that you have never taken steps to place any of the company’s assets beyond the reach of its creditors?

These questions are all designed to establish if there are any grounds to bring wrongful trading/ preference claims.

For example The Insolvency Act, 1986 enables a liquidator of a company to apply to the Court to seek wrongful trading contribution orders from directors and/or ex-directors if the liquidator must show that before the commencement of the winding-up, the company carried on incurring liabilities when the defendant “knew, or ought to have concluded, that there was no reasonable prospect of the company avoiding an insolvent liquidation.”

There are also wide-ranging investigatory powers to call in an insolvent company’s property; make inquiries of relevant persons and investigate the company’s affairs including summoning any person (including directors) who has, or is suspected to have, property or relevant information in their possession before the court for a private examination. There are also wide powers to investigate an insolvent company’s affairs by applying to court for an order summoning an officer or connected individual to appear before the court (i.e., for private examination).

Although the directors have a statutory duty to co-operate with the insolvency officials by accurately, fully and promptly responding to the questionnaire, they would be well advised to consider taking legal advice before they put pen to paper on their reply.

Steps the Insolvency Office/The Insolvency Service can take against an errant director

When an Insolvency Official becomes aware of a cause of action capable of being pursued which will benefit a company’s creditors, they have wide discretion over what to do.

As well as looking at the facts of the particular case, they will also consider whether the proposed defendant has sufficient funds to satisfy any possible successful judgment.

Often cases are easier to bring against a director when the administration of the company was substandard i.e., there was no board meetings/management accounts etc.

The insolvent estate may have sufficient funds to finance an action (including the contingent cost of an indemnity for any personal liability incurred by the Insolvency Official if the case is lost). In such cases, Insolvency Officials may legitimately use those funds to take action, provided they exercise proper commercial judgement. Often their choices are:

  • do nothing;
  • ask creditors to fund the action;
  • fund the action themselves or get their IP firm to do so;
  • enter into a conditional funding agreement with their lawyers either with or without funding insurance;
  • enter into a funding agreement or assignment of the proposed cause of action with a third-party funder; or
  • enter into a damages-based agreement

With high profile insolvencies, Insolvency Officials often feel duty bound to bring proceedings against directors where they believe there are viable claims.

In the court of public opinion, there is ever greater scrutiny of the conduct of boards of directors particularly when claimants have a new source of funding for their claims. There has been an explosion in the amount of third-party funding which is being made available – one report estimates that £70bn of litigation funding has been raised globally in recent years.

The Insolvency Service also has an enforcement role to play. Prior to the introduction of the Disqualification Undertaking regime in 2000, if you faced the potential for Director Disqualification proceedings there was no upfront ability for the director to bring the matter to an end voluntarily.

The Disqualification Undertaking procedure, introduced as a result of the Insolvency Act 2000, was seen as a way of dealing with this issue and making the costs of proceedings more reasonable. The Insolvency Service acting on behalf of the Secretary of State can agree, if circumstances allow, to an undertaking from a director for an agreed period that they:

“will not be a director of a company, act as a receiver of a company’s property or in any way, whether directly or indirectly, be concerned or take part in the promotion, formation or management of a company unless (in each case) he has leave of a court”

The other advantage, if you are prepared to sign up for a Disqualification Undertaking, is that you will normally get a modest reduction of up to 12 months to the period of disqualification that they will accept from you.

Practical advice to directors who receive a questionnaire

It should be noted that the above sanctions (such as wrongful trading) apply in respect of the period where there is no reasonable prospect of avoiding an insolvent winding up. Controls should therefore be established to minimise the risk of insolvent trading. These could include:

(a) the production of detailed, accurate and up-to-date management accounts;

(b)  the production of detailed cash flow statements that reconcile to the P&L a/c and balance sheet (profit does not equal cash and solvency);

(c)  the production of detailed board minutes detailing rationale for decisions;

(d)  obtaining valuations for asset disposals;

(e) the review of sufficient retained profit if intend to draw dividends;

(f)  reviewing not only management accounts but all relevant trading information at regular board meetings where directors are encouraged to raise any specific concerns;

(g) formulating specific areas of responsibility for each director and avoiding conflicts;

(h) reviewing not only past trading performance, but work-in-progress/orders going forward;

(i) reviewing the position of the creditors generally. In particular, you should be very careful about favouring one creditor over another (particularly if connected to the company or some incentive to pay him, e.g. he holds PGs from directors);

(j) considering their own financial position e.g. whether it is appropriate they are paid any promised bonus; and

(k) taking professional advice

It is in the interests of each director to ensure that all deliberations of the Board are fully minuted, thus ensuring that any subsequently appointed liquidator can establish the efforts taken, not only by the board, but by each individual director to protect the company’s creditors. If you are obtaining professional advice in this area, that would be a helpful factor.

On the run-up to insolvency, make sure you are keeping copies of all records. This could involve sending copy emails and relevant documents to your personal email address to make sure these are available post liquidation.

If possible, prior to appointment, ask the potential liquidator/administrator for a copy of the director questionnaire form, this will allow you to make sure you have all the relevant information to answer it.

Co-operate as much as possible with the insolvency practitioner. As many of our politicians will testify, you are just as likely to get into trouble for the cover up than the alleged crime itself! When deciding if a director should be subject to disqualification proceedings, the Insolvency Service will listen to the Insolvency Official re conduct of director post insolvency appointment.

If you are concerned about your conduct, be pragmatic and be prepared to do without prejudice deals with the liquidator. This could involve making a payment for the claim to go away.

Take advice. The forms are very much filled with bear traps, trying to solicit information for follow on claims so directors are well advised to seek legal advice when responding to questionnaires. We have a lot of experience at Fox Williams LLP in terms of guiding directors and companies through the whole process.

Contact us

If you have any questions about these issues in relation to your own organisation, please contact a member of the team or speak with your usual Fox Williams contact.

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