Written by Jonathan Munnery, Insolvency & Restructuring Expert | Last updated: 15 October 2025 | Reading time: 5 mins
Whenever a company enters liquidation (or administration) because it cannot pay its debts, the Insolvency Practitioner (IP) appointed to liquidate the company must conduct an investigation.
As part of that investigation, they will seek to determine the reasons for the company’s failure and the role played by the directors. They will also examine the conduct of the directors over the three years leading up to the insolvency.
The liquidator must then file a Director Conduct Report with the Insolvency Service, outlining their findings. Here we explain what the Director Conduct Report includes, the potential penalties, and what you can do to protect yourself.
Why is a Director Conduct Report necessary?
The Director Conduct Report helps to hold directors accountable for their actions and protects creditors, shareholders and the wider business community.
As the director of a limited company, you have several legal and financial duties you must meet in accordance with the Companies Act 2006. That includes the duty to:
- Promote the success of the company
- Avoid conflicts of interest
- Exercise reasonable care, skill and diligence
- Act within your powers
If the company cannot pay its debts when they are due, or its total liabilities exceed its assets, it is technically insolvent. At that point, the legal duties of the directors switch. They must act in accordance with the Insolvency Act 1986 by:
- Acting in the best interests of their creditors
- Not trading while knowingly insolvent
- Avoiding giving preferential treatment to certain creditors
- Seeking professional insolvency advice promptly
If the company subsequently enters a formal insolvency procedure (liquidation or administration), the Insolvency Practitioner must file a Director Conduct Report with the Insolvency Service. The Insolvency Service will then decide whether to initiate proceedings or investigate further.
Who does the liquidator report on?
It is not just the behaviour of the current directors that the liquidator investigates and includes in their report. They also investigate the role and conduct of directors who have held office in the three years before the company’s liquidation. They also investigate other office holders, including:
- Company secretaries - who support the board of directors and manage the company’s administrative and compliance responsibilities.
- Shadow directors - who are not officially registered as company directors but influence their decisions and the direction of the company.
- De facto directors - who act like directors and perform the functions of a director, but have not been formally appointed.
What does the Insolvency Practitioner investigate?
To compile the Director Conduct Report, the Insolvency Practitioner (IP) investigates the company’s affairs and its management. The goal is to form a detailed picture of how the company operated and determine whether unlawful or negligent behaviour led to its downfall or left the creditors unfairly out of pocket.
To do that, the IP will:
- Interview the directors and company officers
- Review its financial records, including balance sheets, profit and loss statements and bank statements
- Assess the trading behaviour of the company and the directors, particularly in the period leading up to insolvency
- Evaluate transactions, including dividend payments, asset disposal and payments to creditors
- Scrutinise the decisions made at board level
You must cooperate with the liquidator by attending the interview as requested and providing the relevant financial records. Failure to do so can result in court orders compelling cooperation and adverse findings in the report that can lead to penalties.
What does the Director Conduct Report during liquidation include?
The report provides a summary of the company’s financial history, including trading records and balance sheets. It also includes details and assessments of the decisions made by the directors, as well as whether they fulfilled their legal duties before and during the insolvency. And it highlights any areas that may require further investigation.
More specifically, the type of adverse conduct the report will outline includes whether:
- The directors acted in the best interests of their creditors once they knew or should have known the company was insolvent
- The company entered into any transactions that favoured certain creditors over others
- There’s evidence of wrongful or fraudulent trading, such as continuing to trade while insolvent or falsifying financial statements to secure credit
- Creditors were disadvantaged by the sale or disposal of assets at less than market value
- The directors failed to maintain accurate company records or file financial statements and tax returns on time
- There were any other potential breaches that could lead to further investigation
Once the liquidator has completed the report, they will submit it electronically via the government’s online portal. The Insolvency Service will then decide whether the directors should face further sanctions.
What potential penalties can arise from a Director Conduct Report?
In the vast majority of cases, the Insolvency Service will review the report and decide that no further action is necessary. However, there are instances when directors can face financial and legal penalties, including:
- Compensation orders - Directors may be required to pay compensation to creditors who have suffered material losses as a result of their misconduct.
- Personal liability - Directors can be made personally liable for some or all of the company’s debts. This typically arises in cases of wrongful trading, where directors continue to trade despite knowing there is no reasonable prospect of the company avoiding insolvency.
- Director disqualification - Directors can be banned from acting as a director or being involved in the management of a UK company for between two and 15 years. Common grounds for disqualification include trading while insolvent, failing to file accounts and misusing company funds.
- Criminal prosecution - In cases of fraud, directors may face criminal prosecution, resulting in fines and custodial sentences of up to two years. This includes activities such as falsifying financial information to secure credit and accepting customer deposits with no intention of delivering goods.
Should I be worried about a Director Conduct Report?
In most cases of insolvent liquidation, the Director Conduct Report is a formality, and no further action is taken. However, it does underline the importance of taking your legal duties as a company director seriously.
That applies regardless of the company's financial position, as the conduct report can review directors' actions up to three years before insolvency. However, it’s particularly important that directors are fully aware of, and comply with, their legal duties when the company is struggling financially.
These are the steps you can take to protect yourself as a director:
- Seek professional advice as early as possible
- Keep accurate and up-to-date financial decisions
- Document all the decisions made by the board
- Avoid incurring further debt when the company appears insolvent
- Do not pay yourself or connected creditors ahead of others
These actions will demonstrate that you took reasonable steps during the company’s insolvency and acted in the best interests of the company and its creditors. If the company subsequently fails, your personal finances shouldn’t be affected, and you’ll be free to run another company.
Need advice?
If you are worried that your company is insolvent, we can explore your options and help you understand your obligations as a director. We can also guide you through the voluntary liquidation process from start to finish while protecting your interests throughout.
Please get in touch for a free, same-day consultation, or arrange a meeting at one of our 100+ offices throughout the UK.
