The Insolvency Act, Section by Section | Part 1 | Section 206
What happens when company assets go missing in the run-up to winding up?
For directors facing questions about property, records or payments moved in the final months of a company’s life.
Section 206 in plain English
Section 206 of the Insolvency Act 1986 opens Chapter X of the Act, the chapter that deals with malpractice before and during liquidation. It is a criminal provision, and it exists for one situation: a company goes into winding up, and property, records or money turn out to have been moved, hidden or destroyed in the period leading up to it.
The section applies once a company is ordered to be wound up by the court or passes a resolution for voluntary winding up. At that point it looks backwards. Any past or present officer commits an offence if, within the twelve months before the winding up began, they did any of the acts the section lists. The same acts committed after the winding up has begun are caught too.
The reach of section 206
The listed acts fall into five recognisable groups.
Concealing company property
Hiding property above a minimum value set by the legislation, or concealing any debt due to or from the company.
Fraudulent removal
Moving company property out of reach, including transfers to connected people or new entities.
Destroying or falsifying books
Concealing, destroying, mutilating or falsifying books or papers relating to the company’s property or affairs, or making false entries.
Parting with documents
Fraudulently parting with, altering or making omissions in any document relating to the company’s affairs.
Disposing of unpaid-for goods
Pawning, pledging or disposing of property obtained on credit and never paid for, unless done in the ordinary way of the company’s business.
Who the section catches
The offence is aimed at officers of the company, and the net is wider than the board minutes. It covers past officers as well as present ones, so resigning before the petition lands changes nothing. It expressly extends to shadow directors, meaning anyone in accordance with whose directions the board was accustomed to act. A person who never held the title of director, but who in practice called the shots, sits inside the section.
What has to be proved, and by whom
The structure of proof under section 206 surprises most directors, and it is the single most important thing to understand about the provision. For the core acts, the prosecution proves the act itself. Once the act is established, the section supplies its own defence, and the burden of making it out sits with the accused.
Property concealed or removed, records destroyed or falsified, or unpaid-for goods disposed of.
The section provides the defence, and it is for the accused to make it out, on the balance of probabilities.
No intent to defraud, or no intent to conceal the company’s state of affairs or defeat the law.
A documented, honest explanation supported by contemporaneous evidence defeats the charge.
Instinctive decisions with no paper trail leave the presumption standing, and conviction follows.
In practice this reverses the position most people expect from criminal law. The courtroom question becomes whether the director can positively demonstrate an innocent explanation for what happened to the assets or the books. Directors who kept contemporaneous records of their decisions can usually do this. Directors who acted on instinct in a panic usually cannot.
What a conviction costs
Section 206 is a serious criminal offence, triable in the magistrates’ court or the Crown Court. On conviction on indictment it carries a substantial custodial maximum together with an unlimited fine, and the conviction rarely travels alone.
Deliberate stripping of assets ahead of a liquidation regularly results in immediate custody in the worst cases.
A conviction connected with the management of a company opens the door to a lengthy disqualification.
Where a benefit was obtained, confiscation proceedings can follow the conviction.
The liquidator can pursue the value of what was moved through other provisions of the Act. The assets still have to go back.
The stage before any charging decision is where the most ground is won or lost. Femi has spent thirty years on both sides of these investigations, inside HMRC and advising clients across tax and insolvency.
Book a Free 30 Minute CallThe defence, and the conduct that keeps you clear of the section
The statutory defence is intent-based, so everything turns on what a director can show about their state of mind at the time. That is established through evidence, and the evidence is built long before anyone is interviewed. Directors who stay on the right side of section 206 tend to share the same habits.
The safe-conduct record
- Sell company property at a demonstrable market value, with a valuation or comparable evidence kept on file.
- Minute decisions, even in a one-person company, with a short note of the reason.
- Preserve books and records and hand them over intact, however unflattering their contents.
- Keep disposals of goods bought on credit inside the ordinary course of trading.
- Take professional advice before anything outside the ordinary course happens.
- Make full disclosure in the statement of affairs when the time comes.
The HMRC angle
In HMRC-driven liquidations, section 206 has a particular sting, because HMRC arrives with a data trail no other creditor holds. When the liquidator’s picture of the company’s final year is set against that data, assets that quietly left the business stand out in high relief.
Show what stock and turnover looked like quarter by quarter, right up to the end.
Shows exactly when staff and payroll fell away, and what was still moving through the business.
Reach bank accounts and third parties, putting transfers to connected people in plain view.
Femi’s practice sits directly on this ground. Eight years inside HMRC, fifteen years representing clients as a tax adviser at KPMG, Deloitte and Grant Thornton, and a further fifteen years as a solicitor acting for clients in the insolvency space. That vantage point matters at the investigation stage, because the difference between a file that gets referred for prosecution and one that closes with a civil settlement is usually the quality and timing of the explanation the director puts forward.
A worked example
Take a composite scenario, drawn from common patterns rather than any client matter. A wholesale business has fallen behind with VAT and PAYE, and HMRC has warned of a winding-up petition. Two directors, in identical trading positions, handle the final months very differently.
Moves assets quietly
- Remaining stock moved to a storage unit rented in a relative’s name, five months before the petition.
- Delivery van transferred to his brother for a nominal sum.
- Statement of affairs shows almost no assets.
- Liquidator matches the final VAT returns against the vehicle registry. Both movements sit inside the twelve month window.
- At interview, the burden of proving innocent intent is his, with no valuation, no minutes and no commercial explanation.
- Criminal exposure under section 206, and the liquidator claims the van and stock value back through civil proceedings.
Sells in the open
- Same failing company, same asset, same twelve month window.
- Van sold through a dealer at a price supported by a written valuation.
- Proceeds paid into the company account.
- Decision recorded in a short board minute with the reason noted.
- Books handed to the liquidator intact, disclosure complete.
- No realistic section 206 exposure at all.
Related sections and where to go next
Section 206 rarely appears alone on a charge sheet or in a liquidator’s report. Section 207 deals with transactions made to defraud creditors and reaches back five years. Section 208 covers misconduct during the winding up itself, including failure to disclose or deliver up property. Section 209 makes falsification of the company’s books a standalone offence. Each has its own article as Part 1 of this series continues.
If a winding-up petition or a liquidator’s inquiry is already part of your situation, the practical guides in The Director’s Insolvency Survival Guide cover the urgent ground, including what happens when directors come under investigation.
And if questions are being asked about your company’s assets or records now, the time to take advice is before you answer them.
A confidential 30 minute call with Femi O. Ogunshakin, Solicitor, Tax Adviser and Former HMRC Inspector.
Book a Free Call