Informal corporate insolvency procedures increase

The latest figures from the insolvency specialist R3 show that the number of firms opting to be removed from Companies House records has increased by 28% since 2010.

Research by R3 has revealed that the number of companies opting to be simply removed (struck-off) from the Companies House register has jumped from 139,594 in 2010-11 to 178,996 in 2013-14 – an increase of 28%.

The new data provides a more complete picture of company closures than formal insolvency statistics alone, and may help to 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, said: “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’, or 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.”

Andrew Tate warns that creditor interests also risk being undermined by the 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 means that up to £160 million a year of creditors’ money could stay in directors’ hands following insolvencies.