What is a Director’s Conduct Report During Liquidation?
When an insolvent company enters liquidation, an insolvency practitioner will investigate what contributed to the company’s financial decline. This process will assess whether the director(s) have fulfilled their legal duties, managed the company’s affairs correctly, and complied with the relevant regulations.
The insolvency practitioner handling the process then compiles the information into a director’s conduct report. If any criminal or civil wrongdoing is found to have taken place, this case may be passed on to further authorities, including the police and the court system.
What Triggers a Director’s Conduct Report?
During the winding up of a company, a director’s report is typically compiled as part of the insolvency practitioner’s investigation process. However, it can be triggered if concerns or questions have been raised surrounding the director’s conduct and how this could have led to the company’s financial position.
This can include concerns that the director(s) have committed wrongful trading, breached fiduciary duties, failed to provide proper documentation and financial statements, engaged in fraudulent activity, or incurred large debts in the lead-up to the liquidation.
The Different Types of Director’s Reports in Liquidation
In a compulsory liquidation, three distinct types of director conduct reports are generated: the D1 Report, the D2 Interim Report, and the D2 Final Report, each fulfilling a specific role.
D1 Report: This report is issued by an insolvency practitioner if they’ve discovered information that suggests a director’s actions have contributed to the financial distress and failure of a company. This document is used to report the misconduct or mismanagement of a director to the insolvency service for further evaluation.
D2 Interim Report: This document is used if the insolvency practitioner needs more time to continue their investigations. It may serve as a progress update on the director’s conduct, identifying potential concerns and detailing that further investigation is necessary.
D2 Final Report: This report is filed when the insolvency practitioner has found no misconduct or improper behaviour to report and has, therefore, concluded their investigation process.
What Happens During and After a D1 Director’s Report is Submitted?
If an insolvency practitioner suspects any misconduct has occurred and needs to file a D1 report, they may decide to speak directly to the director(s) about their concerns. They may ask for any insights or clarification about their findings which could provide an explanation. This allows the director(s) to give their input, justify their actions, and provide any documentation that will support their position and innocence.
The director will then compile their findings, highlighting the suspected misconduct of the director(s), alongside any relevant evidence or information the director(s) have submitted, and send it to the insolvency service for further investigation.
The insolvency company will then begin a thorough investigation process. This will assess information including, the director(s) financial management, any wrongful or fraudulent trading, and the director(s) involvement in any other failed companies. They will also look into the personal financial affairs of the director(s), and whether they acted in the best interest of the creditors.
What Happens If a D1 Director’s Report Finds Misconduct?
In an insolvent liquidation, if the director(s) have acted untoward and the insolvency service has factual evidence that misconduct has occurred, the director(s) may be subject to several consequences. The severity of these consequences will vary depending on the wrongful acts committed, and the director(s) may face any of the following:
Disqualification: The director(s) could face disqualification from acting as a director for up to 15 years. This falls under the Company Directors Disqualification Act.
Personal Liability: The director(s) may be personally liable for the company’s financial debts, including financial penalties, compensation orders, or even personal bankruptcy.
Criminal Charges: The director(s) could face criminal charges for serious misconduct and illegal actions. In more severe circumstances, the director(s) may also face a prison sentence.
