February 12, 2024

There has been much comment both within the restructuring world and the wider press about the increase in insolvency statistics for companies and how these are now exceeding pre-pandemic levels. But why are compulsory liquidations on the increase?

Compulsory Liquidation

One of the options available to creditors (provided debt greater than £750) is to petition for the winding up of a company.  At a court hearing, a judge has the authority to grant a winding-up order which will result in that company being placed in compulsory liquidation and the Official Receiver being appointed liquidator in the first instance.

For the 2019 calendar year, figures compiled by The Insolvency Service show that compulsory liquidations were 3,001 but these dropped to 491 in the year ended 31 December 2021.  This was the lowest level since they started collating the information in 1960.  The reasons for this significant reduction were three-fold.

The first is that companies had been supported with a number of government-backed schemes including furlough, bounce back loans (“BBL”) and the Coronavirus Business Interruption Loan Scheme (“CBILS”).

The second factor was that HM Revenue & Customs (“HMRC”) were actively supporting businesses and not looking to take action against them.

The third and final factor was the temporary ban on winding up petitions between 1 March and 30 September 2021 unless the petitioning creditor could demonstrate that Covid did not have a financial effect on the company concerned.

Why are Compulsory Liquidations on the Increase?

Whilst HMRC are still supporting businesses by agreeing Time To Pay Arrangements, it is important that directors are proactive and make contact themselves with a proposed repayment plan for their consideration.  Based on recent discussions with directors, these repayment plans tend to be for a shorter period than in periods following lockdown.  HMRC also appear to be taking action (including issuing winding up petitions) more quickly when a company fails to make these agreed payments.

In the year ended 31 December 2023, compulsory liquidations were 2,827 which is significantly higher than the year ended 31 December 2022 (1,961).  There appears to be a change in the political landscape in that politicians want HMRC to recover funds from what they perceive to be a significant line of credit to companies.

It is imperative that directors take professional advice if their company is struggling to meet its debts as and when they fall due.  BRI is always willing to arrange a free initial no obligation meeting with directors to understand the specific financial difficulties their company faces and the potential solutions available.

The main benefits of taking advice early are that the options available are maximised, are likely to be more considered and not as time pressured.  For example, it gives directors time for a refinance or restructure and these plans are more likely to benefit from the support of all creditors.