Forensic Insolvency Services

Forensic insolvency is where forensic accounting meets insolvency law. When a company fails, there are questions. Were assets moved before the collapse? Did directors continue trading when they knew the company was insolvent? Were certain creditors paid ahead of others? Answering these questions requires specialist forensic investigation - the kind of detailed financial analysis that insolvency practitioners need to decide which claims are worth pursuing and how to maximise recoveries for creditors.

This page explains how forensic accountants support insolvency practitioners and solicitors in contentious insolvency work, from antecedent transaction reviews to giving evidence in the Insolvency and Companies Court.

What is forensic insolvency?

Forensic insolvency refers to the use of forensic accounting techniques in the context of insolvency proceedings. It covers any situation where an insolvency practitioner (IP) or solicitor needs financial investigation skills to pursue claims, protect creditor interests, or prepare evidence for litigation.

The Insolvency Act 1986 creates multiple statutory causes of action. Preferences under s.239. Transactions at undervalue under s.238. Transactions defrauding creditors under s.423. Wrongful trading under s.214. Fraudulent trading under s.213. Misfeasance under s.212. Each of these requires forensic analysis to identify, quantify, and prove.

An IP can't pursue every potential claim. Resources are limited, and creditor funds shouldn't be spent on speculative litigation. This is where the forensic accountant comes in. Their role is to analyse the company's financial records, identify viable claims, quantify the potential recoveries, and give the IP a clear cost-benefit assessment before any proceedings are issued.

The overlap between forensic accounting and insolvency is significant. Both disciplines require detailed financial analysis. Both involve reconstructing what happened from incomplete records. And both operate in an adversarial context where the findings will be challenged. A forensic accountant working in insolvency needs to understand both the accounting and the law.

Antecedent transaction reviews

Antecedent transactions are payments or transfers made by a company before it entered insolvency that may be challenged by the IP. The Insolvency Act 1986 provides several grounds for challenge, each with its own rules on timing, burden of proof, and available remedies.

Preferences (s.239 IA 1986). A preference occurs when a company does something that puts a creditor in a better position than they would have been in the company's insolvency. The "relevant time" is 6 months before the onset of insolvency for unconnected creditors, extending to 2 years for connected persons. The IP must prove that the company was influenced by a desire to prefer - though this is presumed for connected persons.

A forensic accountant's role is to reconstruct the payment history, identify which creditors received payments within the relevant time, and analyse whether those payments were made in preference to other creditors. This requires detailed bank statement analysis and cross-referencing against the creditor ledger.

Transactions at undervalue (s.238 IA 1986). A transaction at undervalue occurs when a company makes a gift, or enters into a transaction for significantly less than the value provided by the company. The relevant time is 2 years before the onset of insolvency. The forensic accountant values the assets transferred and compares this against what the company received in return.

Transactions defrauding creditors (s.423 IA 1986). Unlike s.238 and s.239, s.423 has no time limit and no requirement that the company was insolvent at the time. The test is whether the transaction was entered into for the purpose of putting assets beyond the reach of creditors. This is the most powerful antecedent transaction provision, but also the hardest to prove because the IP must demonstrate intent.

Extortionate credit transactions (s.244 IA 1986). Where a company has entered into a credit transaction on extortionate terms within 3 years of insolvency, the court can set aside or vary the transaction. The forensic accountant analyses the terms of the credit, compares them against market rates, and quantifies the excess cost to the company.

Director misfeasance and wrongful trading

Claims against directors are often the most significant recoveries available to an IP. Forensic accountants play a central role in building these cases.

Misfeasance (s.212 IA 1986). This is a procedural provision that allows an IP to bring a summary claim against a director (or other officer) who has misapplied company money or been guilty of any misfeasance or breach of fiduciary duty. Common examples include excessive director remuneration, unauthorised personal expenditure through company accounts, and payments to connected parties without commercial justification.

The forensic accountant examines the company's financial records to identify payments that lack commercial purpose. They trace money flows from the company to the director and connected persons, analyse the director's loan account, and quantify the total amount misapplied. This analysis forms the basis of the IP's claim.

Wrongful trading (s.214 IA 1986). A director is liable for wrongful trading if, at some point before the company went into insolvent liquidation, they knew or ought to have concluded that there was no reasonable prospect of the company avoiding insolvent liquidation - and they didn't take every step to minimise losses to creditors.

This is where forensic accounting is most demanding. The forensic accountant must pinpoint the "moment of knowledge" - the date on which a reasonably diligent director would have recognised that insolvency was unavoidable. This requires analysis of management accounts, cash flow forecasts, board minutes, creditor correspondence, and the company's trading pattern. The forensic accountant then quantifies the losses incurred by creditors from that date onwards.

Fraudulent trading (s.213 IA 1986). More serious than wrongful trading, fraudulent trading requires proof that the company's business was carried on with intent to defraud creditors. This is also a criminal offence under s.993 Companies Act 2006. The forensic accountant's analysis is similar to wrongful trading but focuses on evidence of dishonesty - taking on orders with no intention of paying suppliers, for example, or accumulating HMRC debt while paying the director.

Asset tracing in insolvency

When a company collapses, assets sometimes disappear. Property is transferred to family members. Cash is moved to offshore accounts. Stock is sold at undervalue to connected businesses. The forensic accountant's job is to follow the money and identify what can be recovered.

Asset tracing in insolvency typically involves:

• Bank statement reconstruction - reviewing all company and director bank accounts to trace the flow of funds, identify unexplained transfers, and map the movement of money to connected parties
• Companies House analysis - reviewing confirmation statements, PSC registers, and group structures to identify connected entities that may hold company assets
• Land Registry searches - identifying property holdings of directors and connected persons, including properties acquired during the period of concern
• Beneficial ownership analysis - looking behind nominee arrangements and trust structures to identify who actually controls assets

The forensic accountant's investigation often reveals a pattern: assets moved out of the company in the months before insolvency, typically to the directors or their family members. This evidence supports applications for freezing orders, claims under s.238 and s.423, and (where the conduct crosses into criminality) reports to the Insolvency Service for potential director disqualification proceedings under the Company Directors Disqualification Act 1986.

Forensic accounting for creditor claims

Forensic accountants also assist IPs in adjudicating disputed proofs of debt. Not every creditor claim is straightforward. Some are inflated. Some are fabricated. Some involve related-party debts that may need to be subordinated.

Common issues include:

• Related-party claims. A director or connected person submits a proof of debt. The forensic accountant analyses the underlying transactions to determine whether the debt is genuine, properly documented, and at arm's length.
• Disputed quantum. A creditor claims GBP 500,000 but the company's records show GBP 300,000. The forensic accountant reviews the supporting documents and reconciles the figures.
• HMRC Crown Preference. Since the Finance Act 2020 reinstated Crown Preference for certain tax debts (VAT, PAYE, employee NICs, CIS deductions), the distribution waterfall has changed. Forensic accountants analyse which HMRC debts qualify for preferential status and calculate the impact on other creditors. For advice on HMRC debt in insolvency, our tax specialists at mtd.digital can assist.

Accurate adjudication of claims directly affects the dividend available to unsecured creditors. Getting it wrong means either legitimate creditors are underpaid or fraudulent claims dilute the pot.

Working with insolvency practitioners

The relationship between forensic accountants and insolvency practitioners is collaborative but distinct. The IP has statutory powers and duties. The forensic accountant provides the specialist financial analysis that supports the IP's decision-making.

A typical instruction from an IP might look like this:

"Review the company's records for the 2 years prior to liquidation. Identify any transactions at undervalue, preferences, or potential misfeasance claims against the directors. Provide a cost-benefit analysis for each viable claim."

The forensic accountant produces a scoping report - usually within 2-4 weeks of receiving documents - that sets out: what claims exist, the estimated value of each, the strength of the evidence, and the likely costs of pursuing them. The IP then decides which claims to pursue, taking into account creditor interests and the proportionality of litigation.

Proportionality is a recurring theme. An IP won't pursue a s.238 claim for GBP 50,000 if the forensic costs are GBP 40,000 and the litigation risk is significant. The forensic accountant's initial assessment must be realistic about both the potential recovery and the costs involved.

Fee structures vary. Some forensic accountants work on an hourly rate basis. Others offer fixed fees for scoping reports, with hourly rates for subsequent work. In high-value claims, contingency arrangements or litigation funding may be available.

Insolvency litigation support

When an IP decides to pursue a claim, the forensic accountant's role shifts from investigation to litigation support. This involves preparing a formal expert report, attending joint expert meetings, and - if the case goes to trial - giving evidence in the Insolvency and Companies Court (part of the Business and Property Courts).

Insolvency litigation has some procedural differences from standard civil litigation. Applications under s.212, s.214, and s.238 are made by application notice in the insolvency proceedings, not by separate claim form. The Insolvency (England and Wales) Rules 2016 govern procedure. But the standards for expert evidence are the same - the forensic accountant's report must comply with CPR Part 35, and the expert's duty is to the court.

In misfeasance proceedings, the forensic accountant typically prepares a detailed schedule of the payments challenged, cross-referenced to bank statements and accounting records. The schedule becomes the roadmap for the hearing. In wrongful trading claims, the report addresses the critical date question - when did the director know, or when should they have known - and quantifies the increase in net deficiency from that date.

Forensic accountants with insolvency experience understand the dynamics of these cases. Directors often have limited resources to defend claims. Settlement is common, and the forensic accountant's report is frequently the catalyst for settlement discussions. A clear, well-evidenced report that sets out the losses and the basis of the claim gives the director and their advisers a reason to negotiate rather than fight.

If you need forensic support for an insolvency matter - whether you're an IP considering claims, a solicitor acting for an IP, or a director facing proceedings - contact our forensic team to discuss the case. Jack Ross Chartered Accountants has experience working alongside major IP firms on cases spanning compulsory liquidations, administrations, and CVAs.