INS44090 - What to investigate and how: Debtors: Matters for investigation

Debtors is usually comprised mostly trade debtors but there may be ‘others’ under various descriptions. These others might include money owed by the directors by way of an overdrawn loan account, see INS44150.

When reviewing a Statement of Affairs which shows a significant write down in the debts, then questions should be asked of the directors.

• Establish the basis on which the write down has been calculated. Is it the director’s own figure, which he alone has calculated, or has the liquidator assisted?
• Ask for details of any known bad debts, and ask which companies they relate to.
• Did the company continue to trade with the customer when it became apparent the customer was unlikely to pay?
• Did any of the debtors have special terms such as credit terms in excess of those normally offered to other customers, or additional discount?
• Are any of the directors’ relatives or associates involved in any of the debtor companies?
• Have any of the debts arisen due to a loan being given, as opposed to the debt arising through normal trading activities?
• Have any of the debts arisen as a result of a transfer of assets of the company

If, following your questions, you learn that debtors are much reduced compared to the last balance sheet this might point to

• A reduction in trading levels well before the commencement of the liquidation which could indicate the existence of a successor business through which the bulk of the trade was being conducted.
• Credit notes might have been issued. This could be so that potential future customers of the successor business can avoid payment of their debt to this liquidated company.

Work may have been done by the liquidated company but invoices were issued by the successor company. This would result in the successor company making a profit from sales by the liquidated company.

There may have been monies owed by (or to) associated companies. If this is not shown as being still due you should find out why. If it cannot be repaid (because the associated company is in financial difficulties) you should ask why the funds were loaned in the first place – were the directors breaching their duties to the liquidated company by making a loan to a company in trouble? If so, you should refer this to the liquidator as possible misfeasance under Section 212 IA 1986.