HMRC has potentially lost out on up to £200m in tax revenues over the last year due to ‘shadow insolvencies’.
Shadow insolvencies occur when businesses become insolvent disclosing no assets when they go into liquidation, meaning there is nothing to pay back to out-of-pocket creditors.
A sample analysis by our firm found that there could have been as many as 3,000 shadow insolvencies last year, meaning HMRC lost out on debts of approximately £200 million, with businesses owing an average crown debt of £65,000 each.
In the cases identified, the companies were placed into voluntary liquidation by the shareholders, who would often also be the directors, but there were no assets to pay for the cost of the liquidation. Therefore it is likely that the shareholders or directors have paid personally for the liquidation to be completed.
As part of the insolvency proceeding, a liquidator has a duty to send details of the directors’ conduct to the Insolvency Service and there is a concern that if there are no assets to pay for the cost of the liquidation, the level of scrutiny may be compromised.
In some cases, businesses with no assets are being struck off the company register without even going through liquidation, meaning even less scrutiny of any improper behaviour by directors. The number of company liquidations has fallen sharply in recent years (see chart), suggesting that failing businesses may not be going through a formal insolvency process.
The lack of any kind of formal insolvency procedure in these cases means the true scale of the problem is likely to be far greater, as are the losses that creditors are undoubtedly suffering as a result.
Government proposals to reduce the amount of time for creditors to oppose an application to Companies House for strike-off could make this problem even worse.
The window for creditors to object to strike-off will be shortened from three months to two months under the current draft of the Small Business, Enterprise and Employment Bill, making it even harder for creditors to prevent businesses from disappearing with no assets.
The substantial loss of revenue for the Treasury could be linked to the rise of so-called Zombie Companies during the recession – heavily indebted businesses that have, to date, just about survived on low interest rates and bank forbearance.
Sharp fall in company liquidations – potentially driven by rise in businesses being struck off the register without going through a formal insolvency
Source: Insolvency Service
, Partner in the Restructuring and Insolvency team, comments: “Too many businesses are disappearing with no assets and creditors must be concerned as to why that is the case.
“An increased budget for investigation work carried out by the Insolvency Service against suspect company directors would send out a powerful message to discourage unscrupulous behaviour in the first place.
“This would help to create a level playing field for businesses that publish regular accounts and that don’t try to play the system.”
Restructuring & insolvency