Informal corporate insolvency procedures up by a quarter since 2010
The number of companies opting to be simply removed (‘struck-off’) from the Companies House register has jumped by 28% from 139,594 in 2010-11* to 178,996 in 2013-14, according to research by insolvency trade body R3.
The new data provide a more complete picture of company closures than the formal insolvency statistics alone – and may help explain the lower than expected number of formal insolvency procedures since the recession.
Creditors’ Voluntary Liquidations – an equivalent formal company winding-up procedure that may involve debts being distributed to creditors and the conduct of directors investigated – fell by 1%.
Andrew Tate, Deputy-Vice President of R3, says: “Ordinarily, insolvencies rise following a recession, due to problems like ‘over-trading’ during recoveries or as a delayed impact of the recession itself. Since the 2008 recession, however, insolvencies have fallen.”
“The phenomenon of ‘zombie businesses’ – businesses that survived due to the unique circumstances of the last recession but had little chance of long-term recovery – could partly explain lower than expected insolvency numbers, but falling numbers of ‘zombie businesses’ have not been matched by rising insolvencies.”
“It may well be that many of the UK’s ‘zombie businesses’ have been just removing themselves from the Companies House register rather than opting for a formal insolvency procedure.”
‘Strike-offs’ are designed for companies that have settled business and trading debts, and are now dormant or no longer trading.
Andrew Tate adds: “In cases where there are no assets to distribute to creditors to make, simply ‘striking-off’ a company makes a lot of sense. However, creditors do need to keep an eye out for ‘strike-off’ notifications and object if necessary: their interests may be better served by seeing a company entered into a formal insolvency procedure instead, particularly where there may be hidden assets which could be investigated by a liquidator.”
Creditor objections to ‘strike-offs’ grew by 38% during the same period, rising from 1,738 in 2010-11 to 2,406 in 2013-14 – roughly one objection for every 74 applications, up from one in every 80.
Andrew Tate continues: “In formal insolvencies, creditors’ interests are paramount. Insolvency practitioners will treat them on an equal basis and carry out important tasks like investigating directors’ actions. Although growing faster than the number of applications, it’s slightly surprising that objections to ‘strike-off’’ applications are relatively low: it may be that many creditors aren’t aware of their rights.”
“Creditor interests also risk being undermined by this Government’s proposed changes to civil litigation funding – the Jackson reforms. From April 2015, the changes will make it much harder for insolvency practitioners to return money to creditors from insolvent companies’ directors, and mean up to £160m a year of creditors’ money could stay in directors’ hands following insolvencies. Insolvency litigation must be made exempt from the reforms.”
Applications for ‘strike-offs’ 2010-11 to 2013-14
*Year end 31st March