Will the number of compulsory liquidations continue to increase?

Figures released by the Insolvency Service for May 2022 show a 42 per cent increase in the number of compulsory insolvencies in England and Wales compared to the previous month – up from 95 to 135.

This is in line with previous figures which show an increase in compulsory liquidations in the first quarter of 2022 compared to the same period of 2021.

There may be several reasons compulsory liquidations are increasing:

During the pandemic, figures published by the Office for Budget Responsibility, show the government spent £69 billion on business support schemes; these funds may have allowed companies to pay their creditors. Additionally, rules were introduced at the start of the pandemic to protect companies from compulsory liquidation, or winding up, due to unpaid debts.

Restrictions were implemented by the Corporate Insolvency and Governance Act 2020, preventing creditors from commencing winding up petitions based upon Statutory Demands, in practice making such demands ineffective. Creditors also had to show that the debtor’s inability to pay was not because of the pandemic, a difficult test to meet. This could go some way to explaining the low levels of compulsory liquidations in 2021.

The restrictions came to an end on March 31. From April 1 the process for winding up companies reverted to that in place before the pandemic. It remains to be seen whether an avalanche of compulsory insolvencies will follow or whether more focused efforts to engage by creditors and debtors alike are resulting in earlier settlements.

However, in light of the most recent figures released by the Insolvency Service, there does indeed appear to be an increase in the number of compulsory liquidations that coincides with the lifting of restrictions.

The consequences of compulsory liquidation are significant. A company cannot trade once in compulsory liquidation. A liquidator is appointed to investigate the affairs of the company and sell their assets. A creditor who is owed more than £750 in respect of a liquidated debt can submit a winding up petition to the court. The petition is a request that the company is placed in compulsory liquidation due to their inability to pay their debts.

At Clarke Willmott, our focus is to engage with debtors on behalf of clients to obtain payment as quickly and cost effectively as possible.

The financial impact of the pandemic is no doubt ongoing for many businesses and companies are facing pressure due to increasing costs. The ability to petition for the compulsory liquidation of companies is useful tool in the right circumstances. Despite these being challenging times, we are finding that with the right pressure and cooperation by all parties, amicable resolutions and recoveries are being achieved.