Criminal Enforcement in Company Insolvency
When a company enters insolvency, the conduct of its directors in the period leading up to, and during, the insolvency is subject to scrutiny by the Insolvency Practitioner (IP) or Official Receiver. What begins as a civil process focused on asset recovery for creditors can escalate into a criminal investigation if the Insolvency Service identifies evidence of fraud, concealment, or deliberate misconduct.
Every director, and every shadow director, who held that role in the 12 months before liquidation will have their conduct assessed. A report of unfit conduct triggers a referral to the Insolvency Service, which may lead to disqualification proceedings, a Compensation Order, or, in serious cases, a criminal prosecution.
The Role of the Insolvency Practitioner
An IP's primary function is to collect and realise the company's assets for the benefit of creditors. In doing so, they investigate whether assets were transferred away to protect them from the insolvency process, whether any director received preferential treatment, and whether the conduct of the directors meets the threshold of unfit conduct under the Company Directors Disqualification Act 1986. All directors in the relevant period will have their conduct reported to the Insolvency Service.
The Illegal Re-use of Company Names — Section 216
Section 216 of the Insolvency Act 1986 imposes a five-year prohibition on a director of an insolvent company re-using the company's name or any name that is sufficiently similar as to suggest an association with it. The purpose of this restriction is to prevent directors from walking away from the debts of one company and continuing business under a similar identity — a practice commonly referred to as phoenixing.
Breach of this restriction is a criminal offence. A director who contravenes section 216 may also be held personally liable for the debts of the new company. There are prescribed exceptions, including acquiring the business from a liquidator with formal notice, but these must be followed precisely to be effective.
Wrongful Trading — Section 214
Wrongful trading arises under section 214 of the Insolvency Act 1986 where a director allowed a company to continue trading after the point at which they knew, or ought to have known, that there was no reasonable prospect of avoiding insolvent liquidation. Common indicators relied upon by IPs include dishonoured cheques, County Court judgments, deteriorating credit facilities, and patterns of HMRC non-payment. A successful wrongful trading claim results in the director being ordered to contribute personally to the company's assets.
Wrongful Trading vs. Fraudulent Trading
Wrongful trading is a civil claim based on negligence — the director continued trading when they should have stopped. Fraudulent trading, under section 213 of the Insolvency Act 1986 and section 993 of the Companies Act 2006, involves an actual intent to defraud creditors. Fraudulent trading is a criminal offence and carries a maximum sentence of ten years' imprisonment, as well as personal liability for the company's debts.
Consequences of Criminal Investigation
Where the IP uncovers evidence of hidden assets, falsified records, or intentional fraud, the matter is referred to the Insolvency Service's Criminal Investigations Team. A criminal conviction can result in a custodial sentence, an unlimited fine, director disqualification for up to 15 years, and confiscation proceedings under the Proceeds of Crime Act 2002.
What to Do if You Are Under Investigation
If you have been contacted by an Insolvency Practitioner, the Official Receiver, or the Insolvency Service regarding your conduct as a director, seek specialist legal advice immediately. Do not attend any interview under caution without a solicitor present. The early stages of an investigation — before any formal referral to the Criminal Investigations Team — are often the most important window for making representations and influencing the outcome.