ICAEW’s Professional Standards Department is urging business advisers to make sure they understand the implications of a new High Court ruling on the winding up of businesses.

One of the options for business owners looking to exit their business is a Members’ Voluntary Liquidation (MVL) – a solvent winding up – if the company has sufficient assets to cover its liabilities. 

The Insolvency Act 1986 states that for an MVL, a company’s debts and statutory interest must be able to be paid within 12 months of a statutory declaration being made (or a shorter period if stated in the declaration).

In August, the High Court ruled for the first time that the test was not one of “balance sheet solvency” – ie, that there are sufficient assets available – but whether payment will in fact be made within 12 months (or any shorter stated period). 

The judgment in the case, Noal SCSP v Novalpina Capital, states that if payment will not be possible in the timeframe in the statutory declaration, the liquidation should not be commenced as an MVL. Therefore, for an Insolvency Act solution, the directors would need to instigate an insolvent winding up of the business.

“This decision contradicts the long-standing approach taken by much of the insolvency profession to MVLs,” explains Allison Broad, Head of Insolvency Monitoring at ICAEW. 

“We understand that the judgment is being appealed, but business advisers need to be able to explain the implications to clients and advise accordingly.”

Businesses considering MVL now

Accountants who are advising business owners contemplating an MVL should consider whether it will be possible to pay outstanding creditors and accruing statutory interest within a 12-month period. 

If there are any unusual or uncertain claims that could impact solvency, then advisers should consider the timing of the liquidation, according to Broad. 

“If time isn’t critical, they may want to consider whether it would be useful to defer liquidation until the appeal has been heard, or until the claims are more certain,” she says. 

The Noal SCSP case also highlights the need to ensure that advisers fully understand any contingent liabilities when they're advising directors and shareholders. 

“In this case, a legal claim was initiated for a significant sum shortly after the MVL commenced. It hadn’t been reflected in the MVL declaration of solvency,” explains Broad. “It is crucial for advisers to be confident that they have gone through all of the possible liabilities that a company might have.”

Guidance for insolvency practitioners

Following the High Court decision, ICAEW, alongside the Institute of Chartered Accountants Scotland and the Insolvency Practitioners Association, has provided detailed interim guidance to insolvency practitioners. 

The guidance focuses on the position with companies that have already entered an MVL. If, following appeal the judgment is upheld, the guidance will be revisited.