The Insolvency Act 1986 requires that the books and records of an insolvent company must be handed over by the company’s officers to the insolvency practitioner appointed to deal with the insolvent company’s affairs. Failure to do so is an offence, but there is a statutory defence to the charge, which is available when there is no intent to defraud the creditors. Failure on the part of a director to deliver up to the liquidator all documents belonging to the company that he is required by law to produce can lead to a fine or imprisonment.

Recently, the court considered the question of on whom the burden of proof was placed when the statutory defence was claimed. In the view of the court, the company’s officers were likely to have a better knowledge of the circumstances that led to their non-compliance with the demand for the records than did the prosecution. The presumption of innocence therefore applied and the prosecution had to prove its case on the balance of probabilities.

Says Kelly Hodson, “Although the penalties under the Act for non-compliant officers (a term that includes shadow directors) are severe, this case illustrates the point that proceedings against the officers of an insolvent company can be successfully defended when the circumstances are appropriate. This will come as a relief to directors of companies facing insolvency. If you are an officer of an insolvent company – or an advisor to such a company and are likely to be regarded as a shadow director – it is important to take professional advice as early as possible when insolvency is anticipated.”