Guidance issued as High Court clarifies rule for solvent liquidations

The Institute of Chartered Accountants in England and Wales (ICAEW), the Institute of Chartered Accountants of Scotland (ICAS) and the Insolvency Practitioners Association issued joint guidance at the end of August following a recent High Court decision imposing a strict “12-month rule” for MVLs.

In a ruling in July, the High Court strictly interpreted section 89 of the Insolvency Act 1986 (IA86), confirming that a company in a solvent MVL must pay all its debts within 12 months of the commencement of the winding up or convert the liquidation to a creditors’ voluntary liquidation (CVL). The judgment said that the liquidator has no discretion to make payments to creditors beyond the first 12 months of the liquidation.

The decision is significant for the insolvency profession since MVLs are often the preferred option for solvent companies as the directors retain more control. Commenting on the High Court’s decision, Gemma Kaplan, a contentious insolvency specialist at Pinsent Masons, said the court’s view contradicts the long-standing approach taken by much of the insolvency profession to date towards MVLs. “The decision has come as a surprise to practitioners who have previously been satisfied that a company can remain in an MVL beyond the initial 12 months, provided that the company is balance sheet solvent and has sufficient assets to pay its debts in full.”

Although the ruling is pending appeal, the regulators said they had adopted a “pragmatic approach” and issued guidance ahead of the conclusion of the appeals process to assist the profession in navigating existing MVLs with outstanding debts.

The guidance states that liquidators should review any existing MVLs with outstanding debts and check that there are sufficient assets to settle those outstanding debts, plus statutory interest. If the assets are insufficient, they should take steps to convert the MVL to a CVL. Where possible, creditors should be paid within 12 months of commencement – or a shorter period as stated in the section 89 declaration – and practitioners are urged to take appropriate advice on individual cases and document their decisions on file.

Following the ruling, the regulators also confirmed that – provided there is a good reason why payments haven’t been made with the 12-month period and there are sufficient realisations to pay outstanding debts, plus interest – they will not take any regulatory or disciplinary action against the liquidator on the grounds that the MVL has existed longer than 12 months; creditors were not paid within 12 months; or the MVL was not converted into a CVL within 12 months; or in each case the period stated in the s89 declaration, if shorter than 12 months.

Amy Flavell, a specialist in solvent and insolvent restructuring at Pinsent Masons, said the guidance would help the profession navigate the court’s shift in approach to MVLs pending the outcome of the appeal. “The regulators have stated in the guidance that practitioners should seek advice where required, document the reasons for their decisions and where there are unusual or uncertain claims which could impact solvency, practitioners should consider the timing of the liquidation, and if it is not time critical consider deferring the liquidation until the appeal has been heard,” Flavell said.

For new cases, where liquidation has not yet commenced, Kaplan said insolvency practitioners will need to be mindful of the current case law. “Directors will need to be careful to provide all information to their advisers,” she said. “This includes details of any future, contingent or disputed debts and where assets need to be realised to fulfil those debts, a realistic estimate of time frames and valuation backed by professional advice.”

ICAEW, ICAS and the IPA said they will revisit this guidance if the judgment is upheld on appeal.