What is compulsory liquidation?

Earlier this week The Insolvency Service published some official statistics that sheds more light on the various causes of compulsory liquidations (CLs) of businesses in England and Wales.


Cause and Effect – Why have companies gone into Compulsory Liquidation?

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They cover the period from Q2 2017 to Q1 2019 and reveal more insights into what can trigger a company to be wound up.

 

There are several interesting takeaways from the data but the headline stat is that unfortunately compulsory liquidations are increasing.  

 

In 2017 there were a total of 1959 CLs with 3146 in 2018 – a rise of 60.59%. So far there have been 823 recorded in 2019 which would see the year-on-year figure rise again if continued through the remaining quarters this year at that level.  

 

An alternative comparison can be made by analysing four consecutive quarters against each other (in this case Q2 2017 to Q1 2018 against Q2 2018 to Q1 2019). This method shows 2750 CLs in 2017/18 and 3178 in 2018/19. It’s still a rise but only of 15.56%.

 

CL chart

 

One of The Insolvency Service’s tasks it to investigate the cause of liquidations and bankruptcies to better inform policy and understand which causes are most prevalent. A questionnaire is sent out for completion by directors or the appropriate manager at the insolvent company.

 

Non Surrender is listed as the main cause of insolvency but this is a misnomer. This designation refers to anybody who hasn’t cooperated with the questionnaire or insolvency service in their inquiries.  

 

There could be several reasons why an individual could refuse to comply including criminality but this isn’t the end of the matter. The Insolvency Service has various powers and actions it can take including public examination, applications for court orders, warrants or suspension of a bankrupt’s discharge in order to get to the bottom of the case.

 

Another large section – Null – refers to respondents who fill out other sections of the questionnaire but don’t complete the cause of insolvency section. The rest of the information supplied is judged as valid and this section is only included in order to maintain statistical consistency.

 

The largest self-verified cause of insolvency is management failure with 106 cases in the first quarter of 2019 alone. This has fallen from 143 in the previous quarter but is the only category with over 100 recorded cases in each listed quarter.

 

By comparing the previous two quarters (Q4 2018 and Q1 2019) the picture is more optimistic with less companies suffering insolvency through bad debts, knock on effects or loss of market. The only area which has seen an increase is failure of a new venture, expansion or acquisition and even then this has only risen from 33 cases in Q4 2018 to 34 in Q1 2019.

 

It’s not good news that compulsory liquidations appear to be on the increase and that more companies can find themselves in financial difficulties. HMRC also appear to be taking a strong stance, petitioning where companies do not pay their tax debts.

 

We’ve previously written about what happens during the compulsory liquidation process and the differences between compulsory liquidation and voluntary liquidation so you can gain a greater understanding of what happens and why.

 

Nearly every company that faces compulsory liquidation is able to look back at the decisions taken and realise that there was always a chance to change course and potentially save the business or at least make sure that the company is wound down in an orderly manner with as little stress and worry as possible.

Contact one of our team of expert advisors if you’re worried that your temporary financial downturn is turning permanent or if you can’t see a way forward. The sooner you get in touch, the more options you’ll generally have at your disposal.

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