Criminal & Civil Liabilities for Company Officers in Insolvency
Company directors and other company officers have a range of duties and obligations should their company become insolvent, regardless of whether it continues to trade or trading has stopped.
Failure to comply with these obligations can result in the company liquidator or administrator i.e. the Insolvency Practitioner bringing civil claims against company directors.
As explained in our article entitled ‘Understanding Company Directors’ Responsibilities to Creditors, whilst directors are not normally personally responsible for company debts, mismanagement may lead to personal liability and possible director disqualification.
However, certain conduct arising upon insolvency may lead to criminal prosecution under various Acts such as the Insolvency Act 1986, the Fraud Act 2006 and the Companies Act 2006.
Insolvency Service investigations and HMRC investigations can be extremely lengthy and complex requiring a detailed knowledge of both insolvency procedures and criminal law.
In this article, Nazaqat Maqsoom outlines the offences created by the Insolvency Act 2006 and explains how we can assist clients facing insolvency interviews and/or criminal proceedings.
Potential Criminal Offences for Breach of the Insolvency Rules
The Insolvency Act 1986 (‘the Act’) creates the following offences.
S.206 Fraud etc. in anticipation of winding up.
When a company is ordered to be wound up by the court, or it passes a Resolution for Voluntary Winding Up, any past or present officer of the company, is deemed to have committed an offence if, within twelve months immediately preceding the commencement of the winding up, he has:
- concealed any part of the company’s property for the current specified amount, or concealed any debt due to or from the company, or
- fraudulently removed any part of the company’s property for the current specified amount, or
- concealed, destroyed, mutilated or falsified any book or paper affecting or relating to the company’s property or affairs, or
- made any false entry in any book or paper affecting or relating to the company’s property or affairs, or
- fraudulently parted with, altered or made any omission in any document affecting or relating to the company’s property or affairs, or
- pawned, pledged or disposed of any property of the company which has been obtained on credit and has not been paid for, unless such act was in the ordinary way of the company’s business.
Such a person is also deemed to have committed an offence if he has been privy to the doing by others of any of the prohibited acts show above.
S.207 Transactions in fraud of creditors.
When a company is ordered to be wound up by the court or passes a Resolution for Voluntary Winding Up, an officer of the company is deemed to have committed an offence if he has:
- made or caused to be made any gift or transfer of, or charge on, or has caused or connived at the levying of any execution against the company’s property, or
- concealed or removed any part of the company’s property since, or within two months before, the date of any unsatisfied Judgment or Order for the payment of money obtained against the company.
However, a person will not be guilty where the transaction occurred more than five years prior to the winding up or he can prove that, at the time of the transaction, he had no intent to defraud the company’s creditors.
S. 208 Misconduct in course of winding up.
When a company is being wound up, whether by the court or voluntarily, a past or present officer of the company, commits an offence if he fails to co-operate with the liquidator and does not, for example:
- disclose all the company’s current and disposed of property,
- deliver up all such part of the company’s property as is in his custody or under his control,
- deliver up all books and papers in his custody or under his control belonging to the company,
- inform that a false debt has been proved by any person,
- allow the production of any book or paper affecting or relating to the company’s property or affairs.
An offence is also committed if, after the commencement of the winding up, he attempts to account for any part of the company’s property by fictitious losses or expenses.
S. 209 Falsification of company’s books.
When a company is being wound up, an officer or contributory of the company commits an offence if he destroys, mutilates, alters or falsifies any books, papers or securities, or makes, or is privy to the making, of any false or fraudulent entry in any register, book of account or document belonging to the company with intent to defraud or deceive any person.
S. 210 Material omissions from statement relating to company affairs.
When a company is being wound up, whether by the court or voluntarily, any past or present officer of the company, commits an offence if:
- he makes any material omission in any statement relating to the company’s affairs,
- prior to the winding up, he has made any material omission in any such statement.
S. 211 False representations to creditors.
When a company is being wound up, whether by the court or voluntarily, a past or present officer of the company:
- commits an offence if he makes any false representation, or commits any other fraud for the purpose of obtaining the consent of the company’s creditors, or any of them, to an agreement relating to the company’s affairs or to the winding up, and
- is deemed to have committed that offence if, prior to the winding up, he has made any false representation, or committed any other fraud, for that purpose.
Penalties For Breach
In respect of most offences created by the Act, the description ‘director’ includes any person found to have been acting as a ‘shadow director’.
In respect of any breach of sections 206 >211, set out above, a person guilty of an offence is liable to a fine, imprisonment or both.
Section 212 of the Act allows the court to investigate the conduct of certain individuals during the winding up of a company. It applies where it appears that a person who:
- is or has been an officer of the company,
- has acted as liquidator, or administrative receiver of the company, or
- not being one of the above, is or has been involved in, or has taken part, the promotion, formation or management of the company,
has misapplied or retained, or become accountable for, any money or other property belonging to the company, or has been guilty of misfeasance or a breach of fiduciary or other duty in relation to the company.
The court may, on the application of the Official Receiver or the liquidator, or any creditor or contributory, examine that person’s conduct, and compel them to:
- repay, restore or account for the money or property, or any part of it, together with interest at a rate the court considers just, or
- contribute such sum to the company’s assets by way of compensation for the misfeasance or breach of fiduciary or other duty, as the court considers just.
How Can We Help You?
It is essential that company directors, and any other officers, are aware of their lawful obligations as investigating authorities, such as the Insolvency Service and HMRC, have a broad range of investigative powers to pursue errant company directors and officers.
At KANGS, we understand the complexities and emotional challenges that accompany insolvency service investigations, insolvency interviews and insolvency disputes, making our experienced lawyers best placed to assist you.
If you need legal advice or representation for an insolvency investigation or would like to discuss your circumstances in confidence, our team will be happy to help. Please contact us using the details below:
Tel: 0333 370 4333
Email: info@kangssolicitors.co.uk
We provide initial no obligation discussion at our three offices in London, Birmingham, and Manchester. Alternatively, discussions can be held through video conferencing or telephone.
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