PART 4
December 2008
TRADING INSPECTIONS
8.46 General awareness of inspecting officerThe inspecting officer should, as part of the initial enquires, ensure that the company or individual whom he/she has identified is in reality the person against whom the insolvency order has been made and, in cases where identity is in doubt, should proceed with discretion. The inspecting officer should remember that there is a risk of accepting the unsupported statement of an officer of an insolvent company or a bankrupt. Wherever possible, documentary evidence should be requested to confirm the statement, particularly regarding ownership of assets or details of any business which is being carried on at the time of an inspection. The inspecting officer should be looking out for possible undisclosed assets and ensure that the company officers or bankrupt do not conceal, destroy or remove any of the property of the insolvent. This is particularly important where computerised records are encountered. See paragraph 8.71 and Chapter 66 for further guidance on computerised records.
When an outdoor inspector is conducting an inspection on behalf of the London region, telephone contact may be made with the official receiver who instructed them during the inspection, to obtain advice or guidance on particular situations.
8.47 What to cover with the insolvent on the inspection
When the company officer or bankrupt is first encountered on an inspection, it is likely that they will have various questions. The inspecting officer should ensure they explain the following at an early stage:
(a) That the insolvency order has been made, and provide a copy of the order
(b) The official receiver’s role in the proceedings (see paragraph 8.4)
(c) The company officer or bankrupt’s duties (see Chapter 13, Part 2)
(d) The purpose of the inspection (see paragraph 8.2 and 8.48)
(e) That an interview will still be needed at a later date (see paragraph 8.51 and 8.52).
8.48 What will take place on the inspection?
The main things to cover on an inspection are covered in detail throughout this part. An overview of an inspection is provided here and may be for one or more of the following reasons:
(a) To identify and deal with assets (see paragraph 8.59)
(b) To determine what the trading position is, and make a decision on the continuation of the business (see paragraph 8.57)
(c) To determine the position regarding the premises (including insurance) and if appropriate, secure the premises, and collect any keys (see paragraph 8.53 and Part 6)
(d) To dismiss any employees as at the date of the order (see paragraph 8.67)
(e) To collect any accounting records (see paragraph 8.70 and 8.71)
(f) To identify and protect third party assets (see paragraph 8.64)
(g) To take an inventory of the contents of the premises (see paragraph 8.62)
(h) To locate the insolvent in non-surrender cases (see Part 2).
The inspection report [note 1] should preferably be completed with a company officer or the bankrupt in all cases where trading premises are found. If they are not present, the person in charge of any business premises should be requested to provide the information as far as it may be known. It is important that the person providing the information signs the inspection report as an acknowledgement of the details provided. This will be evidence of the assets, together with third party property, disclosed and should help to avoid subsequent disputes. If they refuse to sign the report, a note should be made on the report and signed by the inspecting officer.
8.50 Preparation of an additional report
In addition to completing an inspection report [note 1], the inspecting officer may, in appropriate cases, prepare an additional report to record matters not mentioned in the inspection report. The report should contain details of premises visited, date, persons seen, nature of enquiries made, results of such enquiries, and the action taken regarding the assets, including details of any items removed from the premises. A brief note of any telephone conversations made during the inspection should similarly be made. The report should be signed and dated by the inspecting officer and placed on the official receiver’s file. The report should provide a written record of the decisions and actions taken on the inspection. There is no standard form for this report, although space permitting, this may be written into the blank pages at the back of the inspection report [note 1].
8.51 Preliminary information and statement of affairs
The inspecting officer may provide the preliminary information questionnaire to the company officers or bankrupt and may exceptionally consider it appropriate for the questionnaire to be completed during the inspection e.g. where the company officer or bankrupt for medical reasons may find it difficult to come to the office. Where a statement of affairs is required [note 2], the inspection may be considered an appropriate opportunity to serve the appropriate forms on the officer(s) or bankrupt [note 3]. A receipt for them should be obtained [note 4].
8.52 Personal delivery of notice
If the inspection is the first occasion that a company officer or bankrupt has been seen, the inspecting officer should provide the appointment letter [note 5] to the officer or bankrupt and, if appropriate, make an appointment for their attendance at the official receiver’s office. A signed copy of the form should be obtained as evidence of delivery.
The inspecting officer cannot insist on access to premises of which the insolvent has no right of occupation, e.g. is neither the owner nor the tenant, or of which he/she is the landlord with a right of entry only in specified circumstances. The inspecting officer should therefore on arrival at the premises request to see a company officer, the bankrupt or other person in charge, as appropriate. If the premises are not owned or rented by the insolvent, then sight of documentary evidence to support this should be requested. If the insolvent has no interest in the premises, all the property which the insolvent owns, or is responsible for, should be removed as a matter of urgency. The insolvent should assist the official receiver in carrying this out but see Chapter 31.0, paragraph 31.0.15 for action which can be taken if the third party owner/occupier refuses to allow the official receiver access to remove the property.
Note that third parties who hold property on behalf of a bankrupt are under a statutory duty to deliver it to the official receiver when he/she is trustee, subject to a third party's lawful right of retention [note 6]. Third party goods should be identified and dealt with in accordance with Chapter 31.0, Part 2. Where the insolvent has a right of occupation but the premises are business and residential, the inspecting officer should attempt to secure the business side from the residential, if this is possible. Information should be sought regarding other possible administrative or trading premises, stores or sites. See paragraph 49.5 regarding the insurance of third party goods.
If the insolvent has let or sub-let the premises, the inspecting officer should obtain the name(s) and address(es) of the tenant(s) or sub-tenant(s) and ascertain as far as possible the terms of their occupation. A copy of any written agreement should be obtained together with details of the rent payable, any arrears and when it is next due for payment. Tenants should be advised that the official receiver will contact them shortly about their tenancy but that on no account should they pay rent to the insolvent. Neither should the inspecting officer collect or accept the payment of rent, as this could be interpreted as the official receiver affirming the right of the tenant(s) to occupy the premises; or, if the person in occupation in fact had no right to occupy, the acceptance of rent could create a tenancy. See Chapters 31.11 and 31.12 for further information.
8.55 Third party involved in business
The inspecting officer should make enquiries regarding any third party trading from the insolvent’s business premises. If a trading name is being used, details of the proprietor(s) should be sought and any documentary evidence (e.g. headed notepaper) inspected to identify the person behind any trading style. This information should be disclosed [note 7] on business stationery and displayed prominently at the business premises if customers and suppliers have access to the premises. If the business is one conducted by an associate of the insolvent, full details should be sought including the date when trading commenced and of any assets transferred by the insolvent to that business.
When carrying out an inspection on a bankruptcy order, if the bankrupt states that the business is run as a partnership, evidence of this should be requested. Evidence may include a partnership agreement, partnership accounts, VAT registration or tax return addressed to the partnership, invoices, business stationery, bank statements or chequebooks. If this is the case, details of the solvent partner should be obtained so that they may be written to for an account of the bankrupt’s share of the partnership.
Before the official receiver can close down a partnership business, he/she must be certain that either a winding-up order has been made against the relevant partnership, that joint bankruptcy orders have been made against all members of that partnership, or an order has been made by virtue of article 14 [note 8]. In the absence of any of these orders it is doubtful that the official receiver is empowered to deal with the partnership. See Chapter 53, Part 3 for more information, particularly paragraph 53.69.
8.57 Consideration of continuing a business
Should an inspecting officer discover that a business is still trading, he/she needs to assess whether it is likely to be beneficial to allow it to continue trading. Following assessment they should telephone the office to make their recommendations prior to taking action to close a business down.
As a general principle, a business must not be carried on unless the official receiver is satisfied that to do so will ultimately be beneficial to the general body of creditors and the estate is indemnified against any resultant loss. Reference should be made to Chapter 62 regarding continuance of a business.
8.58 Consideration of an urgent Secretary of State appointment
If the insolvent is trading at the date of the order and significant value in the estate will be lost if trading ceases, then it may be appropriate to apply for an urgent Secretary of State appointment for an insolvency practitioner to act as liquidator/trustee. The insolvency practitioner could then give consideration as to whether to continue the business or realise the assets prior to closing it down. It is also possible that a bankrupt may wish to apply for an annulment on the grounds that an IVA has been approved to avoid the business being closed down. An insolvency practitioner would be needed to supervise the running of the business, whilst the IVA proposals were put to the creditors. See paragraph 17.52 and 17.53 for more information on urgent appointments.
The inspecting officer must take immediate steps to take possession of the insolvent’s property on behalf of the official receiver [note 9]. Careful enquiries of the company officers or the bankrupt (or in their absence, the person in charge) should be made to discover all possible assets, which may require protection. In a company employees have a duty to co-operate with the official receiver and the official receiver may request current employees of the insolvent, or employees who have been in its employment within the last year, to provide information [note 10]. Cash and other easily moveable assets, e.g. jewellery and cameras, should be located and protected at an early stage of an inspection. Items in which third parties have an interest should be separately identified (see paragraphs 8.64 to 8.66). The inspecting officer must issue provisional receipts to the company officer, bankrupt or other party in charge at the premises, for all moneys collected at the time of the inspection. (See also paragraph 8.99 delivery of cash and other valuables to cashiers.)
8.60 Exempt property generally (bankruptcy only)
The inspecting officer should seek to identify any items that may be claimed as exempt property [note 11] and record brief details of such items on the inspection report [note 1] so that the official receiver may consider any necessary action either whilst acting as receiver and manager or as trustee (see Annex 1 on exempt property, which will shortly be replaced with the issue of a new chapter 30).
8.61 Execution or distress levied
The inspecting officer should make enquiries to establish whether an enforcement officer or county court bailiff has taken ‘walking possession’ over all or any part of the insolvent’s property, has levied distress or has removed goods. If execution has not been completed at the time when notice of the insolvency is given to the enforcement officer or bailiff, the official receiver can claim any goods seized [note 12]. If execution or distress has been levied, the inspecting officer should obtain details of the enforcement officer or bailiff concerned, the items seized and the date of seizure. Reference should be made to Chapter 9 for further information concerning executions and distress and other forms of action against the property of the insolvent.
The inspecting officer should prepare an inventory of any stock, plant and machinery, equipment, furniture, fixtures and fittings etc belonging to the insolvent. This should usually be prepared with the company officer(s) or bankrupt to avoid later disputes concerning the assets comprised in the estate. The inventory should, wherever possible, state the make, type and any serial number of large items of plant, machinery, equipment, etc. The inventory should be signed by the company officer/bankrupt present to avoid any later disputes. If the officer/bankrupt refuses to sign the inventory, the inspecting officer should record the refusal and sign and date the note.
8.63 Professional preparation of inventory
A professionally prepared inventory should only be obtained if the inspecting officer cannot prepare an adequate inventory, and it is considered absolutely necessary due to the nature of the stock or quantities involved or their value. Such inventories will be expensive and are not always of any benefit. Reference should be made to Chapter 32.3 regarding the employment of an agent to undertake an inventory.
8.64 Identification of third party items
The company officer(s) or bankrupt should be asked to identify all items on the premises in which third parties have an interest. The items may be subject to;
The company officer(s) or bankrupt should produce all relevant documentary evidence, e.g. contracts, agreements, invoices etc. The inspecting officer should keep a record of items where documentary evidence of the name and address, together with the nature of the third party interest, is not available for removal.
8.65 Separation of third party goods from insolvent’s property
Where machinery or similar items are identified as third party property, the inspecting officer should consider attaching a label with the name and address of the claimant. When an item of equipment is subject to a hire purchase or lease agreement, the name of the owner may be displayed on a plate affixed to the machine. If a large quantity of items is shown to belong to third parties, the items should be clearly separated from the insolvent’s property and any agents subsequently instructed should be advised accordingly. Reference should be made to Chapter 31.0, Part 2 regarding subsequent action in relation to third party goods.
8.66 Ownership claim by bankrupt’s relatives or friends
If a bankrupt’s relative or friend claims any property, those items should be clearly identified in the inspection report [note 1]. The relative or friend should be informed that they might be required to make a statutory declaration of ownership and produce documentary evidence in support of their claim [Note 13].
The effect of a winding-up or bankruptcy order is to automatically terminate employees’ employment on that date. Therefore, unless the insolvent’s business is to be continued (see paragraph 8.57), the inspecting officer should confirm the dismissal of staff. If the business is to continue, employment will be terminated on the date of the insolvency order, but in effect employees who continue working will have commenced a new contract from that date forward. The inspecting officer should request all employees to assemble (if possible with company officers or the bankrupt in attendance), advise them of the insolvency proceedings, that the business is to cease and that they are dismissed. The employees should be advised that they might have a claim under the Employment Rights Act 1996. The inspecting officer should take copies of the booklet “Redundancy and Insolvency – A Guide for Employees” [note 14] to hand out on the inspection if it is suspected that the insolvent has employees. The claim form is contained in the back of the booklet, and can also be found on the www.insolvency.gov.uk website, under ‘publications’ and ‘forms’.
(Amended June 2013)
Under the insolvency provisions of the Employment Rights Act 1996, if an employer becomes insolvent the Secretary of State may pay certain debts owing to employees from the National Insurance Fund. See paragraph 76.44 for more details. The most common of these debts are:
The inspecting officer should collect names and addresses of all employees and inform them that the official receiver will forward all employees a letter explaining their rights under the Employment Rights Act 1996 [note 15]. This letter lets the employee know about their rights under the Employment Rights Act 1996 and provides a cover to form RP1. Original form RP1s must be used and can be obtained through the BIS Publications order line by either phoning 0845 0150010 or emailing publications@BIS.gsi.gov.uk and requesting copies (reference number URN10/708). The employees’ names and addresses may be recorded on the schedule of employees which forms part of the preliminary information questionnaire (if completed at the inspection) or on any written additional report produced by the inspecting officer. See paragraph 8.50.
8.69 Other matters regarding employees
On no account should any of the insolvent’s funds be paid to the employees in respect of any outstanding wages, salary, holiday pay, expenses etc. The employees must not be permitted to retain assets or cash in respect of such sums. PAYE and wages records and contracts of employment should be located and taken to the official receiver’s office. Reference should also be made to Chapter 76 regarding employment law.
The company officer(s), bankrupt or person in charge should be requested to produce all the trading books and records of the insolvent and other documents relating to the estate, e.g. documents of title, cheque books, bank cards and correspondence. If they are not at the premises being inspected, the inspecting officer should obtain details of their whereabouts. There are various powers of the official receivers and the courts under the Insolvency Act 1986 which can be used to ensure that the official receiver obtains such records (see paragraph 31.0.14) [note 16]. Reference should also be made to Chapter 10, Part 1 regarding custody of the insolvent’s records.
8.71 Computerised accounting records
Where an inspecting officer encounters computerised accounting records, immediate action should be taken to protect the data stored on computer and preserve the discs on which data is stored. It may be appropriate to request that the company officer/bankrupt print off a copy of the accounting records whilst the equipment is in situ. Only records dated from the last audited accounts should be printed, and consideration should be given as to how time consuming, and how costly the exercise will be before deciding to go ahead. For example, if the volume of printouts is likely to be large, it may not be worth printing every record, but consideration could be given to obtaining printouts of any management accounts, and other significant records. Care should be taken to supervise and ensure the information is not corrupted, see paragraph 66.17 for more details. Reference should be made to Chapter 66.
[Back to Part 3 – Safety of staff on inspection] [On to Part 5 – Other matters to be dealt with on inspection]