Enforcement agencies such as the police, Serious Fraud Office, Trading Standards and Financial Services Authority (FSA) have a high public profile, but the Companies Investigation Branch (CIB) is often overlooked as a key weapon in the fight against fraud and corporate misconduct.
It would be a mistake to ignore the significance of the CIB. In the past few months, at least 25 companies have been wound up following investigations instigated after complaints from consumers.
Even if an investigation does not result in a winding up petition, it can still lead to damaging consequences for a business, including financial loss and a damaged reputation. Therefore the powers of the CIB should be understood to assist in minimising the risk of exposure to such an investigation and, more positively, to be aware of the possible assistance CIB may provide when making a complaint against a company.
What is the CIB?
The CIB is part of the regulatory arm of the Department for Business, Enterprise & Regulatory Reform (BERR) and acts on behalf of the Secretary of State. It is a sub-department of BERR’s Insolvency Service, although the CIB’s main purpose is to investigate solvent companies, potentially exposing all active businesses to the risk of investigation from this body.
Investigations are made under civil procedure and are, essentially, fact-finding exercises, so the Police and Criminal Evidence Act (PACE) 1984 does not apply. CIB’s investigative powers are set out in Part XIV Companies Act (CA) 1985, a regime that many find unexpectedly draconian in comparison to that arising out of a criminal investigation, as will be explained below. It is worth noting that while the CIB cannot conduct criminal investigations itself, it can refer its findings to another enforcement agency that does have the necessary powers.
When will the CIB investigate?
CIB receives complaints from a wide range of sources: the public, Trading Standards, other regulators and other parts of the Insolvency Service. These complaints are assessed to decide whether an investigation is both in the public interest and the prospect of follow-up action is likely. Generally, there must be reasonable grounds to suspect fraud, serious misconduct or material irregularity in a company’s affairs for an investigation to be initiated.
The remit of the CIB is quite clear – it will investigate a company if the following criteria are met:
- there has been a complaint of corporate abuse, serious misconduct, fraud or general sharp practices;
- the target is a limited company or limited liability partnership (LLP);
- the target has a business address or addresses in England, Wales, Scotland or Northern Ireland; and
- the business is actively trading, or has ceased trading without going into formal insolvency proceedings.
There are also circumstances where the CIB will not investigate and these include the following:
- the business is a sole trader, partnership (without limited liability) or dissolved company;
- the business is already being investigated (including for criminal matters) and CIB’s involvement would provide no additional benefit;
- the only issue is non-payment of a debt, or a commercial dispute;
- the issue is internal to the company, its management or shareholders and there is no wider public interest in investigating;
- the complaint is better dealt with by another public body; or
- the complaint is about the quality of goods or services, or a delay in supplying them.
A complaint made to the CIB by an individual or a company will be assessed for risk, which will indicate how quickly an investigation should commence. Factors contributing to this risk can include more than one complaint against a particular target or the alleged fraud being of significant monetary value.
Once a complaint is made to the CIB, the complainant can expect to receive an acknowledgement of it in writing. After this, there is likely to be no further contact with the complainant, who will be offered no updates, compensation or any other remedy by the CIB.
Following acknowledgement of a complaint, background research is undertaken to determine whether an investigation is warranted and if so, with what priority. The company that is the subject of the complaint will not be approached at this stage. In some circumstances, the CIB may contact the complainant for further information. A decision is then taken as to whether an investigation should commence. The CIB may decide that there is insufficient reason to investigate or there is no wider public interest.
What happens in an investigation?
If an investigation is initiated, there are a range of powers in CA 1985 allowing the Secretary of State, or someone authorised by them, to enquire into the affairs of a company and any related matters. The CIB is empowered to investigate on behalf of the Secretary of State. An enquiry will generally involve a request for information and explanation. It could also extend to a visit and forced entry to a premises without notice.
Section 447 details the powers available to the CIB in an investigation:
2) The Secretary of State may give directions to a company requiring it:
- to produce such documents (or documents of such description) as may be specified in the directions; and
- to provide such information (or information of such description) as may be so specified.
3) The Secretary of State may authorise a person (an investigator) to require the company or any other person:
- to produce such documents (or documents of such description) as the investigator may specify; and
- to provide such information (or information of such description) as the investigator may specify.
An investigator can therefore request documents (in any form) and also a statement from any person. The CIB can also make conditions that these requests be complied with at any time or place as they instruct. The powers under s447 provide that the production of a document does not affect any lien that a person has on the document and a ‘document’ includes any information recorded in any form. If the documentation is illegible or relies on specialist understanding then the investigator may impose a requirement that a legible form be provided or an explanation.
An investigation initiated without warning can be unsettling for individuals involved. Some simple measures can be taken to manage the investigation and maintain some control over disclosure. Any person receiving a request for documents or information is therefore entitled to ask the investigator to provide evidence of their authority, the production of which is provided for under subsection 4. The reasonableness of the CIB’s request will then be considered, as will the time frame in which the request should be complied with.
Representations can be made to the CIB or an appeal to the High Court lodged. If a requirement is not complied with then the CIB will refer the case to the High Court.
If the court is satisfied that a person failed without reasonable excuse to comply with a requirement of the CIB, they will be dealt with as if they were guilty of contempt of court. As mentioned previously, these powers are far stricter than PACE, where a right to silence exists, allowing for non-self-incrimination and putting the burden of the investigation on the investigating authority.
The CIB also has powers to enter and remain on company premises. Usually CIB does not give a company any warning of an investigation before serving authority under s447 and requesting entry to the premises. Surprise is often essential to avoid giving the company the opportunity to remove or destroy records.
The power to enter premises is provided in s448A. If it is considered that entry to a premises will materially assist in the exercise of the investigation then an investigator may, at all reasonable times, require entry to relevant premises and remain there for such period as they think necessary. Any person who intentionally obstructs a person lawfully acting under these powers is guilty of an offence and is liable to pay a fine on conviction.
Care should therefore be taken, as in all regulatory investigations, to be co-operative with an investigation to minimise the risk of criminal sanctions or contempt proceedings.
For someone under investigation by the CIB, an interview situation can be difficult. The interview is not governed by PACE, as this is not a criminal matter. However, failure to co-operate could result in contempt of court proceedings being brought. There are no safeguards allowing co-operation to be declined for fear of self-incrimination; again, failure to co-operate could lead to contempt proceedings and the company being wound up. However, s447A does contain some safeguards against self-incrimination because statements made by persons in compliance with a requirement under s447 may not be used against the person in any subsequent criminal proceedings.
There are certain protections provided to a company under investigation, including provisions at ss448-449. Immunity from legal liability for breach of contractual or other duties of confidence is provided to anyone volunteering information to the CIB.
Immunity will only arise if the disclosure is:
- volunteered and not made in compliance with a requirement imposed under the CA 1985;
- relevant to the investigation;
- made in good faith and in the reasonable belief that it will assist the investigation (ie must not be a malicious complaint);
- not more than is reasonably necessary for the purpose of assisting the investigation; and
- not in breach of a statutory duty of confidence (eg the Data Protection Act 1998) or of legal professional privilege.
No disclosure should be made by a person carrying on the business of banking or by a lawyer if an obligation of confidence is owed in that capacity.
Possible outcomes of an investigation
The aim of the CIB is to stop disreputable companies from being able to trade. Once a company has been investigated, the CIB must determine whether it is being operated contrary to public interest (eg in a manner likely to cause harm, detriment or loss to third-party consumers, investors or traders). In those circumstances, an application can be made to the High Court to make a winding up order, which the court will make if it is of the opinion that it is just and equitable to do so. The petition to wind up the company in the public interest is provided for under the provisions of s124A of the Insolvency Act (IA) 1986.
If it is deemed that the behaviour of the directors is such that they appear ‘unfit’ to act in that role, the CIB can additionally apply to the court for them to be disqualified from acting as company directors.
In addition to these civil remedies, any information obtained by the CIB may be passed to BERR prosecution lawyers, the police or other investigatory agencies, with a view to them carrying out a criminal investigation, if it appears that a criminal offence has been committed by the company or its officers.
If the CIB considers that breaches can be remedied, it may simply send out a warning letter to the company concerned.
It is also possible that the investigation shows the original concerns to be unfounded and no other concerns have arisen, in which case no further action will be taken.
Case studies
In May 2009 a mediation company that claimed to be able to recover compensation for fraud victims from a central European fund was wound up in the High Court. After complaints from clients, the CIB discovered that no central European fund existed and of the £670,000 taken in fees, no compensation had been paid out.
The CIB further uncovered false company addresses and misrepresentations by the company as to length of service. The petition to wind up the company in the public interest was presented under s124A of the IA 1986 on 5 March 2009. The Official Receiver was appointed as provisional liquidator of the company on 6 March 2009 and the company went into compulsory liquidation on 5 May 2009.
Another reported case involved a Northampton-based fish importer. Irregularities were found in its company accounts; bank accounts were found to be integrated with those of the directors; and money outstanding in county court judgments was owed. A petition was submitted and the company was ordered to liquidate.
The most widely reported CIB success was against a group of companies owned by Spencer Michael. The companies promised potential investors the chance to become instant millionaires, inviting them to attend seminars at a cost of between £2,000 and £4,000. Some people who attended the seminars later went on to invest in buy-to-let properties, sometimes borrowing money on their credit cards to do so. Complaints were made to the CIB by some of the investors. The CIB discovered that, amongst other mismanagement, clients’ money was paid into Michael’s personal accounts to fund his own property dealings; deposits were not returned on purchases that did not proceed; and there was no accounting to clients for rents received. At least 30 investors were owed nearly £1.6m. The petition by the CIB was first presented in the High Court on 7 November 2006. Due to delay and appeal, the company was finally ordered into liquidation on 29 April 2009.
These examples show that the CIB does not restrict itself to any particular type of business. It investigates cases that could also be investigated by the Office of Fair Trading, the FSA or the police. If a company’s bad practices get on the radar of the CIB, although not as well resourced as some other agencies, its powers are such that an investigation can be much quicker and more effective to the company. It won’t end in any criminal convictions but the information gathered under the wide powers of the CA 1985 can be passed to other enforcement bodies as a near-completed case for criminal proceedings to follow if appropriate.
By Craig McAdam, solicitor, Russell Jones & Walker, Manchester. E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .