The sharp increase in creditor voluntary liquidations has raised concerns about the potential for abuse of the process, which allows companies to get rid of their debts with minimal scrutiny.
CVLs, where a company’s shareholders agree to wind up a business due to insolvency, have reached record levels, making them the most common form of corporate insolvency in the UK.
Data obtained through a freedom of information request revealed that the proportion of CVLs to compulsory liquidations, a court-ordered process, has risen significantly. While the ratio was around 2:1 before 2012, it had reached 25:1 by 2021. Last year, one in every 272 UK companies entered voluntary liquidation, leading to calls for tougher regulations.
Stephen Hunt, partner at insolvency firm Griffins, attributed the rise partly to lower costs due to technology, but warned against misuse. “CVLs are often sold by unqualified salespeople to unsophisticated customers seeking cheap liquidation,” he said. Hunt also stressed that the high cost of compulsory liquidation, administered by a formal receiver, has contributed to the rise in CVLs, with the latter being seen as a less expensive option.
Fixed fees introduced in 2016 have made many insolvencies financially unattainable for practitioners, raising concerns that large debts will be written off from tax and creditors without proper examination. Hunt urged the government to reintroduce fees on a percentage basis to ensure better scrutiny of liquidation issues.
Nicky Fisher, former chair of R3, the UK’s insolvency trade body, noted that liquidating a company through the courts was becoming more expensive, with creditors often reluctant to commit funds when the prospects for recovery were slim. Therefore, CVLs, being faster and cheaper for shareholders, have become the preferred option, especially in difficult post-pandemic trading conditions.