A sharp rise in the number of creditors’ voluntary liquidations (CVLs) has raised alarm over potential abuse of the process, which allows companies to cancel debts with minimal scrutiny.
CVLs, where a company’s shareholders agree to close the business due to insolvency, have reached record levels, making them the most common form of corporate insolvency in Britain.
Data obtained through a freedom of information request showed that the ratio of CVLs to compulsory liquidations, a court-ordered process, has risen dramatically. While the ratio was roughly 2:1 before 2012, in 2021 it reached 25:1. Last year, one in 272 British companies went into voluntary liquidation, leading to calls for stricter regulation.
Stephen Hunt, partner at insolvency firm Griffins, attributed the increase partly to lower costs due to technology, but warned against abuse. “CVLs are often sold by unqualified salespeople to inexperienced customers looking for low-cost liquidation,” he said. Hunt also highlighted that the higher costs of compulsory liquidation, which is administered by the official liquidator, have contributed to the rise in the number of CVLs, as the latter is seen as a more affordable option.
Fixed fees introduced in 2016 have made many insolvencies financially unfeasible for practitioners to investigate, raising concerns that significant tax and creditor liabilities are being written off without proper investigation. Hunt urged the government to reintroduce percentage-based fees to ensure better supervision of liquidation cases.
Nicky Fisher, former chief executive of R3, the UK insolvency trade body, noted that winding up a company through the courts has become more expensive, with creditors often reluctant to pledge money if recovery prospects are slim. CVLs, which are faster and cheaper for shareholders, have therefore become the preferred option, especially in challenging post-pandemic trading conditions.