Section 447 Investigations (Companies Act 1985) – Inspectors Knocking on the Door Unannounced!

How our team of Commercial and Insolvency Litigation Solicitors can help when faced with a section 447 investigation

Much of the case work undertaken by the 12 strong Team of insolvency litigation solicitors here at NDP involves dealing with company and insolvency related problems, including acting for Insolvency Practitioners in carrying out their instructions on company insolvency matters. The company is, by definition, dead by this point. As with the Team’s significant Commercial and Insolvency Litigation caseload and its pre-insolvency advice caseload, Section 447 Investigations give the NDP Team members the opportunity to advise Directors and their company, during the life of the company, albeit in often distressed circumstances.

In this article we look at Section 447 Investigations by the Insolvency Service’s Criminal Enforcement Team. These usually happen unannounced, sometimes at dawn, with little or no advance warning for the company involved and can have very serious consequences for companies and directors personally. We detail what they are, what their implications are (and these can include compulsory winding up, director disqualification and even criminal proceedings) and how we can help directors in what can be a highly stressful situation.

The purpose of this article

  1. To explore the nature, powers and extent of a Section 447 Investigation into a company.
  2. The potential implications of that 447 investigation; and
  3. What value NDP can add to the client faced with that investigation.

What is a Section 447 Investigation?

The Secretary of State has far-reaching investigative and interrogative powers under section 447. The main provisions read as follows (with our emphasis added):

‘447 Power to require documents and information:

  • The Secretary of State may give directions to the company requiring it –
  • to produce such documents (or documents of such description) as may be specified in the directions;
  • to provide such information (or information of such description) as may be so specified.

(5)      A requirement under subsection (2) or (3) must be complied with at such time and place as may be specified in the directions or by the investigator (as the case may be).

(7)      The Secretary of State or the investigator (as the case may be) may take copies of or extracts from a document produced in pursuance of this section.’

Comment

The legislation further provides that the Investigator in the case has the same powers, so that the Investigator can deal with the moving feast that is the investigation.

The stated goal of the Secretary of State is:

‘Regarding insolvency related fraud and associated corporate misconduct, working to deter fraud in companies by investigating and prosecuting breaches of insolvency and company law.’

The brief is thus clear. To eradicate fraud and misconduct. Most company investigations are carried out under section 447.  The department for Business, Energy and Industrial Strategy (‘BEIS’) via the Insolvency Service Criminal Enforcement Team, initiate Section 447 Investigations.

What type of matters are investigated?

Investigations (based on NDP’s extensive insolvency litigation experience) might typically take place because there are grounds for one or more of: a suspicion of fraud, misfeasance, misconduct, fraudulent trading, theft or that the company is involved in an illegal pyramid selling scheme.

Who initiates complaints?

The Insolvency Service investigates complaints from several sources to include the Police, Trading Standards and members of the public.  It is unlikely that the Investigator will disclose the source or nature of the complaints that lead to the Section 447 Investigation.

The unannounced knock on the Company Front Door – Little or no advance notice

The Insolvency Service’s powers under section 447 are administrative, in the sense that they are not encumbered by the rules of natural justice in relation to, for example, advance warning.

However, a notice given under section 447 must not be excessively wide or in unreasonable terms and those giving the notice must have acted fairly. As a matter of administrative law, the Secretary of State must have good reason for acting.  Section 447 Investigations are not commenced lightly.

Scrutiny of the terms and extent of the Notice is always needed, by an experienced, critical eye. NDP’s Team of insolvency litigation solicitors are well used to doing that.

How long will the investigation last?

The Secretary of State aims to complete section 447 enquiries within an average of 90 days. That time is often exceeded in our experience.

What can be investigated and sought?

An Investigator may give Directions to the company requiring it to produce such documents as the Investigator may specify or provide such information as the Investigator may specify (section 447(3)).

A requirement to produce documents or information must be complied with at such time and place as may be specified in the Directions or by the Investigator (section 447(5)) or within such further time as may be agreed.  Extended time for compliance by the company can be and is often agreed by negotiation.

However, failing to comply with such a Direction is not an option for the company or its Directors.   There are serious consequences – see below.

If the company refuses to co-operate, the Investigator can obtain a Search Warrant and attend at the premises with the Police to search for and seize documents.

The Secretary of State or the Investigator is entitled to take copies of or extracts from a document produced (section 447(7)) and, for this purpose, a document includes information recorded in any form (section 447(8)).

Consequences that may flow from a Section 447 Investigation

Consequences may flow not only for the investigated company but also for the Directors of the company, personally.  The Secretary of State could potentially (by way of hypothetical example) act on produced documents and information by deciding to present a Winding-Up Petition against the company on the public interest ground that it is just and equitable to wind-up the company, under section 124A(1) of the Insolvency Act 1986. In an appropriate case, a provisional Liquidator may also be appointed to the company.

Less serious sanctions can be agreed or imposed by negotiation.  Serious stuff indeed.

Director Disqualification

By way of another typical example, information or documents obtained under section 447 could and do form the basis for a decision by the Secretary of State to apply for a Disqualification Order against the company’s Directors in the Public Interest, on the grounds that the Directors have engaged in ‘unfit conduct’.

Such consequential action can be (and often is) opposed by the company and its Directors.  That however can be a legally expensive road to follow, albeit one that must be followed out of practical necessity.  The objective of the client and the appointed legal team must be to prevent matters reaching that stage.

The role of NDP as the Solicitor is to assist the company and its Directors from that point being reached. Achieving that objective is an art not a science.  The response and strategy of the targeted company approach in each case is always tailored to the particular circumstances of the case.

Criminal Proceedings

It is also possible for information disclosed in a Section 447 Investigation to be deployed in criminal proceedings against individuals involved in the company under investigation.

Any statement made by a person who complies with a requirement under section 447 of the Companies Act 1985 may be used in evidence against him (section 447A(1)). However, in criminal proceedings in which that person is charged with a relevant offence, no evidence relating to the statement may generally be adduced by or on behalf of the prosecution and nor may a question relating to it be asked by or on behalf of the prosecution  unless evidence relating to it is adduced or a question relating to it is asked in the proceedings by or on behalf of that person (section 447A(2)).

Comment

Great care therefore must be taken by the Director and the Legal Team advising the Director in such circumstances.

Reputational Damage

Section 447 Investigations are civil (not criminal) in nature. Investigations are confidential and conducted in a way that need not prejudice the business of the company.

The sting in the tail is, however, that the Investigator can (and often does) contact suppliers and customers of the company.  Employees and former employees may also be contacted.   There are steps that can be taken to minimise the need for such contact and to thus protect the company.

Non-compliance by the Director

There are serious penalties for failure to comply with requests for information during a Section 447 Investigation. Where there has been a failure to comply with a section 447 request, an Inspector, the Secretary of State or an Investigator may certify this fact in writing to a Court (section 453C(2)).  If this happens, the Director and the company is in potentially very deep and dangerous water.

The consequences of non-compliance

If (after hearing any witnesses and any statement offered in defence) the Court is satisfied that that the offender failed without reasonable excuse to comply, it may deal with him as if he had been guilty of a Contempt of Court (section 453C(3)).  Potential penalties for the company and/or a defaulting Director thus include a fine or imprisonment.

Consequences for the Director if the investigated company goes into Liquidation

Consequences may include a Director Disqualification investigation for the Director and also consequential financial recovery action from the Liquidator against the Director, to include the setting aside of improper antecedent transactions in the relevant period prior to liquidation or even a prosecution for Fraudulent trading.

If a company were to be wound-up on the just and equitable/public policy ground referred to above, under Insolvency Act 1986 section 124A(1), there would be a high likelihood of a Director disqualification investigation and Director Disqualification proceedings following against one or more of the Directors.

In short, a Section 447 Investigation can have very serious consequences indeed, for both the company and its Directors.

What value can NDP add to Director interviews in the Section 447 investigation?

  • Assistance in preparing for, and during, the interview

The Director(s) will be interviewed (often more than once) by the Investigator as the investigation progresses.  It is vital that the company and its Directors are best represented in such meetings.  It is important to try and establish a rapport with the Investigator to avoid the risk of misunderstanding or of the Director being misled, whether inadvertently or otherwise.

Interventions in such interviews/meetings, on behalf of the Director, are vitally important.  Such interventions ensure (for example) that there is clarity as to whether any criminal proceedings are in contemplation. The presence of a full Legal Team (perhaps including Counsel) on behalf of the company and its Director(s), is likely to act as a restraining influence on the Investigator, discouraging the Investigator from exceeding his/her remit and powers or otherwise acting improperly or unfairly.

It is vital that the Director is fully represented when meeting the Investigator, to ensure both that the Director complies with his statutory obligations under section 447 and so that the Director is protected to the maximum extent properly permissible in law against any possible repercussions.

  • Ensuring compliance with the provision of information and documents

As explained above, the repercussions for non-compliance are potentially very extensive and very serious.  It is important that such legal representation should include both attendance in Director interviews and a supervisory watch over all documents and information disclosed.

That ensures proper and lawful compliance and allows us to guard against any difficulties which might arise from the release of documents.  Experience counts for everything in such cases.

  • Communicating with the Insolvency Service on the Client’s behalf

This is an extremely important function for the specialist insolvency litigation Solicitor. It can shape and guide the direction and outcome of the investigation process.  It puts needed distance between the very focused and targeted Investigator and the company.

  • Ensuring company and Director rights and entitlements are protected

This applies in relation to the investigation process itself, in relation to dawn raids on premises that are occasionally carried out and in relation to any enforcement action that might ensue.

  • Our Insolvency Litigation Solicitors’ experience in Section 447 and related cases

The NDP Team is usually involved in advising on 447 cases, at any point in time. We are presently advising on such an investigation into 11 companies.

We have advised in relation to many such cases in the past.  The Insolvency Service know us and our reputation in this field of work.

We know how to deal with such cases, through experience.  We have within the Team over 120 years of combined experience of dealing with insolvency and company law related work, both in civil law and criminal law. There is not much, if indeed anything, we won’t have seen before.

  • Insurance cover

Individual Directors and ex-Directors should retain records of potentially responsive insurance cover – most likely Directors and Officers (‘D&O’) cover.  If such insurance is in place, then it often responds to section 447 investigations.

If you or one of your clients/contacts, are facing a Section 447 Investigation, then please contact our insolvency litigation specialists: Neil Davies, David Hanman, Sukhbir Mall or Suky Mann of our experienced Team of insolvency for assistance and guidance.

We offer free initial consultations for Section 447 Investigations and all business and insolvency crime cases.

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