Surge in Creditors’ Voluntary Liquidations Sparks Concerns Over Abuse

A significant rise in creditors’ voluntary liquidations (CVLs) has raised alarms about potential misuse of the process, allowing companies to eliminate debts with minimal scrutiny. CVLs, where a company’s shareholders agree to wind up a business due to insolvency, have reached record levels, becoming the most prevalent form of corporate insolvency in the UK.

Recent data obtained through a freedom of information request reveals a dramatic surge in the ratio of CVLs to compulsory liquidations, which are court-ordered processes. This ratio, previously standing at approximately 2:1 before 2012, skyrocketed to 25:1 by 2021. Alarmingly, last year, one in every 272 UK businesses entered voluntary liquidation, prompting urgent calls for stricter regulations to oversee this process.

Stephen Hunt, a partner at insolvency firm Griffins, attributed the rise in CVLs partly to reduced costs facilitated by technology. However, he cautioned against the potential for abuse, stating, “CVLs are often sold by unqualified salespeople to unsophisticated clients seeking cheap liquidation.” He further noted that the higher costs associated with compulsory liquidation, which is managed by the Official Receiver, have driven many to opt for the more affordable CVL route.

The introduction of fixed fees in 2016 has also raised concerns among industry experts. These fixed fees have rendered many insolvencies financially unviable for practitioners to investigate thoroughly, leading 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 ensure better scrutiny of liquidation cases and protect the interests of creditors.

Nicky Fisher, the past president of R3, the UK’s insolvency trade body, highlighted that the costs associated with winding up a company through the courts have increased, causing creditors to hesitate in committing funds when recovery prospects are slim. As a result, CVLs have become the preferred option for shareholders, particularly in the challenging trading conditions that have emerged in the wake of the pandemic.

The rising trend of CVLs underscores the urgent need for regulatory reforms to ensure that the process is not exploited, ultimately protecting the interests of creditors and maintaining the integrity of the corporate insolvency framework in the UK. As the landscape of corporate insolvency evolves, stakeholders are calling for a reevaluation of existing practices to prevent abuse and enhance transparency.