The UK insolvency regime is far from creditor-friendly

The data released in December 2024 by the Insolvency Service, the government body which oversees all insolvency activity, confirms that the average return for unsecured creditors in the UK’s most regularly used insolvency process was a big fat zero and that the cost of the process far outweighs the asset realisations.

The study looked at the outcomes from a sample of creditors’ voluntary liquidations (CVLs) over the past seven years. CVLs are by far the most common UK corporate insolvency process. Over the last 10 years, 74% of all UK business failures have been CVLs, rising to 85% in the last three years. There has been an average of 16,808 CVLs per annum over the last ten years. In 2023, CVLs were at their highest level in twenty years.

CVLs occur when a company's management team decides it is insolvent and there is no alternative rescue option. Although it initiates the process, control of the company passes immediately to one or more licensed insolvency practitioners (IPs), who have a statutory duty to wind up the company in the best interests of the general body of creditors.

The Insolvency Service’s headline findings are startling. In 86% of CVLs, there was no recovery for any class of creditor. The average cost of a CVL is 163% of asset realisations. The inescapable conclusion from these statistics is that by the time almost all UK companies are put into a CVL by their directors, they are not only insolvent, but grossly and irretrievably so. There are a range of serious reasons why this matters for the UK business community.

Non-connected creditors

Every bad debt is a problem to the creditor concerned, whether they are a supplier, a landlord, or even a bank. This is especially problematic if the money is owed to a smaller business. Research in 2024 showed that delayed payments cost small businesses GBP 1.6 billion in 2023, double the figure for 2021.

How much worse, then, for creditors when a late payment issue turns into a non-payment disaster. When a supplier with a gross profit margin of 10% suffers a GBP 10,000 bad debt, it must achieve an extra GBP 100,000 in sales just to cover that loss.

Employees

In theory, amounts outstanding to employees of a failed UK company are protected by a government guarantee. However, this is capped and any amounts not covered are a total loss for employees when their company goes into a CVL and cannot pay its debts at all.

The taxpayer

The UK taxpayer also suffers when a failed company doesn’t settle its payroll and other tax liabilities. Any sums paid to employees under the government guarantee scheme increase this cost.

Connected creditors

Shareholders and directors of failed companies are often owed money for loans provided, and where they have given personal guarantees, they become liable for any unpaid company debts, such as to lender, landlords, and in some cases, suppliers. 

Worse still, in the financial crisis which precedes a CVL, directors often borrow funds from family and friends or use their personal credit cards to pay company liabilities. In certain circumstances, UK tax authorities can claim back unpaid company tax debts from directors personally.

Disqualification and other action against directors

In every UK insolvency case (including CVLs), IPs are obliged to investigate and report on the conduct of the company’s directors. This may lead to action by the Insolvency Service to disqualify them from acting as directors for up to fifteen years, or to pursue other claims against them for a variety of offences. Delaying putting a company into the appropriate insolvency process to the point where there is no recovery for creditors leaves directors at particular risk of being made to pay personally for at least some of their company’s debts.

Lessons for company directors, professional advisers, and creditors

The endemic habit of leaving it too late to put UK companies into liquidation hurts all stakeholders. Shareholders must write off their investment, directors are at risk of disqualification and having to pay their companies’ debts, employees lose not just their jobs but usually some of the money they are owed, and all other classes of creditor are left empty handed. 

For professional advisers, decisive action should be on the agenda when they are close enough to a business to know a high-risk situation. Persuading their clients to face up to their problems at the earliest opportunity may not only save money for stakeholders, it also greatly increases the chance that the business can be rescued.

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Nick Hood is Senior Adviser to the Opus Business Advisory Group. He was a Chartered Accountant for over fifty years and a licensed insolvency practitioner between 1992 and 2010, specialising in mid-market and SME business problems. He is a committed internationalist, having previously created and run the largest international association of specialist business rescue firms.