Overview Of Investigating Director Transactions
When investigating Director transactions sometimes the tables turn and the investigator winds up being the subject of some investigation. It perhaps should not be this way. Provided the investigator acts properly and with authority then the burden to answer questions should not flip onto them.
A Liquidator enters office as a stranger having no prior dealings with the company that has gone into Liquidation
An investigation is not adversarial legal proceedings. However, that does not mean it is a welcome proposition for the party having their financial life unpicked and conceivably even having transactions they thought were acceptable in effect unticked. Nevertheless, a Director has a mandatory duty due to Section 235 of the Insolvency Act 1986 to cooperate with the Liquidator and provide such information they may reasonably require.
A Liquidator has a duty to investigate a company’s affairs to ensure its assets are discovered and then realised. Not all assets sit on the balance sheet. Liquidator claims for example arising due to the Insolvency Act 1986 otherwise known as Insolvency Act claims, will not be found in a set of published accounts.
Burden Of Explaining Director Transactions
A core feature of any Liquidation investigation is transactions involving Directors and Shareholders who for many small owners managed businesses are the same people. Potentially the simplest of those is transactions involving Director payments from a company.
When a Director of a UK company has its money then he or she in view of their fiduciary Director duties has a duty to account for the same and demonstrate that they were entitled to receive it. This was confirmed in the case of GHLM Trading Ltd v Maroo and others [2012] 2 BCLC 369 which said:
Once it was shown that a company director had received company money, it was for him to show that the payment was proper and, similarly, where debit entries were correctly made to a director’s loan account, it was incumbent on the director to justify credit entries on the account, since he would have been one of those responsible for the management of the company and for ensuring that proper accounting records were kept.
As a result, the obligation is fairly and squarely with the Director to answer the Liquidator’s reasonable questions when investigating Director transactions. The Liquidator is searching for the facts that might not be available from company records or where such records may be insufficient to fully understand the purpose for transactions to conceivably assess their integrity.
Liquidator Investigation Example
This shifting nature of investigations arose when investigating Director transactions cropped up in a Liquidation case being recently reviewed by Oliver Elliot’s CEO, Elliot Green.
We considered certain payments to a company Director that did not appear readily capable of being fully determined from company records and asked the Director about them accordingly. There were two blocks of payments queried.
The first block of payments appeared to have the characteristics of being capable of challenge by a Liquidator as ultra vires dividends (“Block 1 Payments”). The second block of payments were queried as they amounted to payments from the company’s bank account to the Director who had suggested they were dividends (“Block 2 Payments”) although we had not sought to definitively categorise them as the facts were still being sought from the Director.
In relation to the Block 2 Payments we invited the Director to confirm the basis it was suggested they were dividends.
Upon speaking to the Director we suggested they might wish to obtain legal advice and we shortly thereafter received a letter from a legal adviser asking us for details of all information relied upon to say that the Block 2 Payments were ultra vires dividends. However, the problem was that we had not suggested the Block 2 Payments were dividends. We had asked why the Director said they were dividends. It may upon investigation be the case that the Block 2 Payments were dividends but we were investigating their nature.
The point was we asked a question and in response, we had been asked to provide information and documentation. That does not appear to be the natural order of things when answering questions.
If matters have not reached an adversarial position then oppression and fishing for information does not appear to arise as an issue.
However, Liquidators might want to be alive to the issue of potentially infecting matters when asking questions about facts that may give rise to claims and at the same time justifying such questions with suggestions such as threatening proceedings for recovery of those claims. There appears no need to do so when investigating Director transactions as the burden is on the Director to justify the money they have received from the company.
