ICC Judge Agnello KC held that, for the purposes of deciding whether a s.89 IA 1986 declaration of solvency can be made (and the associated question of whether a company in MVL should be converted into a Creditors Voluntary Liquidation (“CVL”) by s.95 IA 1986), the relevant test is whether payment of the company’s debts together with interest will be made within the 12 month period (or such shorter period as is stated in the s.89 declaration).
In summary, the case held that the test for s.89 or 95 IA 1986 is not one of balance sheet solvency but whether payment in full (with interest) will be made within 12 months (or, if shorter, the period stated in the s.89 declaration).
The case suggests that a company would not be ‘solvent’ for the purposes of s.89 or s.95 merely because there were sufficient funds to pay a company’s debts and interest, rather s.89 and s.95 both require that those debts and interest will in fact be paid within 12 months of the commencement of the Members Voluntary Liquidation (or such shorter period stated in the s.89 declaration), failing which the liquidation should not be commenced as an MVL (or, if commenced as an MVL should be converted to a CVL).
ICAEW, ICAS and the IPA understand that the judgement is being appealed. In the interim, as a first instance decision of the High Court, it is persuasive but not binding so may or may not be followed in future cases before the High Court. So, what should IPs do in the meantime?
From a regulatory and disciplinary perspective, given the pending appeal, ICAEW, ICAS and the IPA are taking a pragmatic approach in relation to existing MVLs with outstanding debts. IPs should review any existing MVLs with outstanding debts to check that there remain sufficient assets to settle the outstanding debts, plus statutory interest. If there aren’t, they should take steps to convert the MVL to a CVL in accordance with sections 95 and 96 of the Insolvency Act. Wherever possible, creditors should be paid within 12 months of commencement (or such shorter period as stated in the s.89 declaration of solvency). IPs should take appropriate advice on individual cases and document their decisions for the file.
Pending the outcome of the appeal, provided that (in any case) there is good reason for payment not to have been made within the period stated in the s.89 declaration and the liquidator is satisfied that there are (or will be within a reasonable time) sufficient realisations to pay any outstanding debts, plus the accruing interest, regulatory or disciplinary action will not be commenced against the liquidator of an MVL merely on the grounds that:
- an MVL has existed for longer than 12 months (or the period in the s.89 declaration), or
- creditors were not paid (or can not be paid) within 12 months (or the period in the s.89 declaration), or
- the MVL was not converted to a CVL within 12 months (or the period in the s.89 declaration).
The judgment (at paragraph 52) confirms that an MVL can last for more than 12 months, if debts and interest thereon have been paid in full. Therefore, if there are no creditors, or if they have been paid in full, section 95 would not apply and an MVL can exceed 12 months, even if the liquidator's remuneration and other expenses or capital distribution to members have not been paid.
In relation to new cases (where the liquidation has not yet commenced), IPs should seek advice where required and document the reasons for their decision on the case file. If there are any unusual or uncertain claims which could impact solvency, IPs should consider the timing of the liquidation. If time isn’t critical to the liquidation IPs may want to consider whether it would be useful to defer the liquidation until the appeal has been heard. When discussing with stakeholders whether a company should enter MVL or CVL, IPs should consider highlighting the current case law, which is first instance and subject to appeal, and the individual case specific risks to stakeholders.
If, following appeal, the judgement is upheld, ICAEW, ICAS and the IPA will revisit this guidance.