Surge in Creditors’ Voluntary Liquidations Raises Concerns Over Abuse

A significant rise in creditors’ voluntary liquidations (CVLs) in the UK has sparked concerns about potential misuse of the process, which allows companies to shed debts with minimal oversight. CVLs, in which shareholders agree to wind up a business due to insolvency, have now become the most prevalent form of corporate insolvency in the country.

Recent data obtained through a Freedom of Information request highlights a dramatic increase in the ratio of CVLs to compulsory liquidations, which are court-ordered processes. While the ratio was approximately 2:1 before 2012, it skyrocketed to an alarming 25:1 by 2021. Last year alone, one in every 272 businesses in the UK entered voluntary liquidation, prompting urgent calls for stricter regulatory measures.

Stephen Hunt, a partner at the insolvency firm Griffins, attributes this surge partly to the reduced costs associated with technology but warns of potential exploitation. “CVLs are often sold by unqualified salespeople to unsophisticated clients seeking cheap liquidation,” he explained. Hunt further noted that the higher expenses related to compulsory liquidation, which is overseen by the Official Receiver, have made CVLs a more attractive option for many companies looking to minimize their financial liabilities.

Concerns have also arisen from fixed fees introduced in 2016, which have made it financially unviable for insolvency practitioners to investigate many cases. This has led to fears that substantial tax and creditor debts are being written off without adequate examination. Hunt has called on the government to reintroduce percentage-based fees to enhance scrutiny of liquidation cases and ensure that debts are properly addressed.

Nicky Fisher, a past president of R3, the UK’s insolvency trade body, echoed these concerns, stating that the process of winding up a company through the courts has become increasingly costly. Creditors are often hesitant to invest funds when the chances of recovery are slim. As a result, CVLs, which are faster and less expensive for shareholders, have become the preferred route for many businesses struggling in the challenging post-pandemic trading environment.

The increasing prevalence of CVLs, while indicative of broader economic challenges, highlights a critical need for enhanced oversight to protect creditors and ensure that the insolvency process is not exploited by those looking to evade their financial responsibilities. With the current trends raising alarms, the call for regulatory reforms has never been more pressing.