Insolvency Practitioner’s Difficulty Obtaining Company Records

Insolvency Practitioner’s Difficulty Obtaining Company Records Overview

An Insolvency practitioner’s difficulty obtaining company records is rightfully considered of great importance.

It is the dominant documentary evidence required by a Liquidator to unearth and discover transactions Directors have entered into.

What Are Company Records?

Company records are those documents whether held in electronic or paper form that comprise a company’s record of its transactions and dealings. 

Company Directors have a mandatory duty to keep company books and records. However, there is no standard that prescribes how they are to be kept beyond lists of sale invoices and purchase invoices for VAT purposes where applicable. There are types of documents that need to be kept for a company to comply with both Section 386 of the Companies Act 2006 and Statutory Records referred to in Paragraph 62 of Schedule 36 of the Finance Act 2008 for tax purposes but many companies will keep records in a different way. 

What Is An Insolvency Practitioner’s Difficulty Obtaining Company Books And Records?

In a nutshell, there are two potential difficulties for an Insolvency Practitioner seeking books and records. The need to discover what records were kept and then obtain them if they still exist.

Directors’ duties incorporate the requirement to hand over the company books and records to an Insolvency Practitioner such as a Liquidator. This is not in doubt but they can only produce what they have. 

A failure to properly record transactions in the first place may give rise to an offence under Section 387 of the Companies Act 2006. However, this unhappy consequence of failing to keep them inescapably does nothing to produce them. 

Company Records Risks

It is perhaps ironic that the good order of a company’s accounting records may deteriorate as it heads toward the insolvency iceberg. This is the point in time when transactions may warrant being put under the microscope as a company ship starts to sink and creditors are scratching around trying to save their own businesses due to the losses incurred following the insolvency of another.

Company records can be at their most vulnerable in a company’s dying period. There may be fewer resources available to pay to keep them up to date. There may be less incentive on the part of Directors to ensure they are available as to do so aids investigators looking for clarity of what went wrong. It is harder to investigate if there is less flesh on the bone but then again the penalties for misconduct ramp up considerably if what is needed for investigation purposes is deliberately destroyed. 

Importance Of Company Books And Records

The importance of the company books and records to the investigations of an Insolvency Practitioner and to the Secretary of State is afforded notable recognition in the Insolvency Service’s Dear Insolvency Practitioner Number 80 (“Dear IP 80”). Here there is a reference to the public interest arising from such records being obtained. Likewise is also recognition difficulties may surface. 

Dear IP 80 highlights the opportunity for the Insolvency Practitioner to go to Court to attempt to obtain a Director’s cooperation. The suggestion appears to be an Insolvency Practitioner should make use of the statutory provisions and that “commerciality should not outweigh the public interest”. However, that position presumably relies upon sufficient funds being in the insolvent estate for commerciality not to outweigh the public interest. It has to be taken on board that any application to court carries a risk of adverse costs and if there are no funds in the estate an Insolvency Practitioner is not generally obliged to put their personal funds are risk.

Whilst the Court will usually take a dim view of a Director who has company records but does not hand them over, such a potentially simple problem can be outdone by an absence of funds to pay legal costs for a Court application.

Practicalities Of A Court Application

The practicalities may want some consideration To obtain records you need to know what records were kept so that you can specify them in an application for their production. Issuing an application for a Court Order in general terms to obtain ‘all company records’ may leave such an Order lacking teeth if you haven’t got a proper idea of what all records mean in the context of the given company. A Director who is being unhelpful may first need to be examined before turning to the form of Order for production. This may increase the costs of such applications.

A further challenge might involve obtaining copies of records that might offer illuminating insights held by third parties who may have played a part in creating records. Addressing that might be fine but for the matter of satisfying what can sometimes involve navigation of a tricky and circular reasonable requirement test in Section 235 of the Insolvency Act 1986. 

The issue with Section 235 of the Insolvency Act 1986 might be this – is the test of reasonableness the same threshold for a person who comes to the affairs of an insolvent entity with no prior first hand dealings, as one who is not a stranger to its affairs? Ordinarily, it is axiomatic an Insolvency Practitioner who enters office as a stranger needs to see what company information is available to decide what use it might have. If investigations are to be thorough the legislation needs to expeditiously afford an Insolvency Practitioner with the tools to hoover all company information from its Directors and agents.

The Court system currently takes time to list and hear even applications under Section 236 of the Insolvency Act 1986. It would be concerning if claims did not get discovered in time due to lengthy Court delays. But limitation periods can come along and claims can be snatched away making them more difficult to progress because they do not get discovered in time. The public interest would appear served if claims that ought to be discovered are unearthed even if they are later not progressed. 

When it comes to obtaining statutory tax and accounting records there appears some merit in an argument that a change in the law might be warranted to enable an Insolvency Practitioner holding office to obtain such records without a lengthy wait. A more streamlined process could perhaps be introduced to determine document disputes.