Insolvency And Criminal Investigations

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Rahman Ravelli’s Nicola Sharp and Syedur Rahman explain the
importance of early legal advice when facing questions regarding a company’s

When a company collapses, it is a testing time for everyone
associated with it: owners, creditors and trading partners.

Whether it is an individual whose business has collapsed or
a company that has ceased trading, the Insolvency Service (IS) will attempt to
find out the reasons why the enterprise has gone into administration. It will
start looking at the collapse of a company from a civil law aspect; examining
whether there has been an issue of incompetence and any breach of the Companies

But such an investigation will not necessarily remain a
civil law matter. The answers you give initially when questioned could later form
part of a criminal investigation. For that reason, it is very important that
you seek the right legal advice at the earliest possible opportunity.

If or when the IS issues a petition
for the compulsory winding up of the company or bankruptcy proceedings, the Official
Receiver (OR) will be notified and will
be responsible for collecting and preserving assets and investigating the
causes of the winding up of a company. You need legal advice from the moment
you know that the company’s collapse is to be investigated by the IS or the OR.


Thinking that any investigation will always remain a civil
law matter could be a huge mistake. You need specialist lawyers with a business
crime background once the IS or OR asks you to attend an interview. This is
because questions that may appear to have been asked in connection with civil
law matters can have implications should the investigators later decide that
the company’s failure is a criminal matter.

Section 236 of the Insolvency Act
1986 deals with inquiries into company dealings where that company has been
made the subject of a winding up order by the Court. Under Section 236, officers
of a company have a duty to provide information in relation to company
enquiries. If they fail to do so, this section allows the Court to summons to
appear before it any officer of the company, any person known or suspected to
have in his possession any property of the company or any person the Court
thinks capable of giving information concerning the promotion, formation,
business dealings, affairs or property of the company.

Where a person without reasonable
excuse fails to appear before the Court when summonsed the Court may, under Section
236(5), cause a warrant to be issued for
the arrest of that person or the seizure
of any books, papers or records in that persons possession.

Following winding up orders or voluntary liquidation, the OR
is legally obliged to investigate how a company failed and examine the conduct
of its directors in accordance with the Company Directors Disqualification Act
1986. The OR can also request that information be provided under section
236(2)(a) or Section 236(2)(c) of the IA 1986.

Putting it in the most basic terms: Section 236 gives the
authorities a lot of power regarding a collapsed company and everyone
associated with it. A failure to recognise and respond appropriately to this
would be dangerous.


Section 236 (2) is designed to help discover the truth
regarding a company’s problems so that its affairs can be put in order and the
liquidation process completed. But – and this is where the right legal advice
is crucial – any information obtained for this purpose can be used to alert the
appropriate authorities to wrongdoing, prompt a criminal prosecution or bring
disqualification proceedings against a director.

For this reason, anyone questioned under Section 236(2) must
be aware of the possible implications of what they say under interview. The
section applies to directors, debtors, shareholders, auditors, solicitors and
bankers. Anyone who is questioned under either Section 236(2)(a) or Section
236(2)(c) could later be subject to criminal investigation.

Section 236(2)(a) applies to any officer of the company.
Under it, anyone questioned is legally obliged to answer the questions – saying
you have no knowledge is not enough. This section is often used where
investigators suspect that there are shadow directors – people not named as
company officers who are actually running it without any formal position.
Section 236(2)(c) applies to any person that the Court thinks is capable of
giving information regarding the business dealings of the company.


As Section 236(2) offers the authorities such scope for
further action, anyone questioned has to find out if they are being questioned
under Section 236(2)(a) or Section 236 (2)(c). This will prove especially
important if you are suspected of being a shadow director of the company as
opposed to someone who merely had dealings with the company.

The distinction between Section 236(2)(a) and Section
236(2)(c) is a major one. If you are asked under Section 236 to appear before
the court for examination, submit a witness statement or produce any records,
you may have some scope under (2)(c) to resist. But if you are being questioned under (2)(a) you then have
very little, if no scope at all, for resisting answering questions, as an
officer of the company has a duty to provide information.

At this stage, the right legal representation can help you
seek clarification about which section you are being questioned under and
advise you accordingly. For example, there may be sound legal reasons why, even
if you are being questioned under Section 236(2)(c) – and,
therefore, there may be scope not to answer questions or provide information –
it may be in your interest to cooperate partially or fully with investigators.


Failure to establish which section you are being questioned
under and any subsequent lack of caution regarding how you answer questions can
lead to bigger problems developing later.

For example, answers you give to questions that may appear
insignificant in connection with Section 236(2)(c) could take on greater
significance if the OR or IS later decides
to recommend that you be disqualified as a director or prosecuted.
Alternatively, it may be in your best interests to volunteer answers to some
Section 236(2)(c) questioning. Only by seeking the appropriate legal advice can
you be sure of navigating safely what can be a legal minefield.

The OR or IS is required
to report any evidence of possible criminal offences that they uncover while
investigating a company’s affairs to The Insolvency Service’s Enforcement
Directorate, which will then consider whether a prosecution is appropriate. By
this stage, you have to have made sure that you have followed legal advice that
has prevented any unnecessary suspicions being aroused.

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