High Court reaffirms strict “12-month rule” for member voluntary liquidations

A recent High Court judgment has confirmed that the “12-month rule” in Members’ Voluntary Liquidations (MVLs) is a strict requirement, not a flexible guideline.

In Noal SCSp & Ors v Novalpina Capital LLP & Ors, the court held that if a company in MVL cannot pay all its debts (including interest) in full within 12 months of winding-up, the liquidation must be converted to a Creditors’ Voluntary Liquidation (CVL). The decision provides important clarity on directors’ and liquidators’ duties and has significant implications for insolvency practitioners and their staff handling MVL appointments.

Background

The case centred on a company that entered MVL with relatively modest assets (under £100,000). Shortly after the MVL commenced, a creditor initiated legal action in Luxembourg, asserting a claim valued between £14 million and £247 million against the company. The company’s directors and shareholders disputed this claim, insisting the company was solvent. Initially, the appointed liquidator considered converting the MVL to a CVL in light of the claim, rather than immediately adjudicating it. However, the shareholders replaced that liquidator with a new one before any conversion occurred.

The new liquidator, acting on legal advice that the Luxembourg claim was unlikely to succeed, effectively valued the contingent claim at zero and chose not to formally adjudicate it under Rule 14.8 of the Insolvency (England and Wales) Rules 2016. On paper, this meant the company’s liabilities could be met and the liquidation remained an MVL. Crucially, no payments were made to the creditor, and the contentious claim remained unresolved as the 12-month mark approached. The aggrieved creditor (holding the disputed claim) applied to the court for the MVL to be converted into a CVL, pending the outcome of the Luxembourg litigation.

Court’s decision: Clarifying the “12-Month Rule”

The High Court examined the statutory provisions – notably section 89(1) and section 95 of the Insolvency Act 1986 (IA86) – to determine the scope of the so-called “12-month rule” in MVLs. 

The key clarifications from Deputy ICC Judge Agnello KC’s judgment include:

• 12 months means payment, not just solvency: Directors initiating an MVL must make a statutory declaration that the company “will be able to pay its debts in full, together with interest at the official rate, within such period, not exceeding 12 months” from the start of winding up. The court emphasized this isn’t merely a balance-sheet solvency test over the long term – it’s a cashflow test of the ability to actually pay all debts within 12 months of commencement or such shorter period stated in the statutory declaration (for the purposes of this article we will just refer to either timeframe as the 12-month period). 
• “All its debts” includes disputed and contingent liabilities: The requirement to pay all debts in full within the year is comprehensive, covering contingent, prospective, and disputed debts as well. Even claims under litigation or subject to appeal count as debts that must be dealt with in the 12-month window. The Judge referenced Re Danka Systems plc (2013), a Court of Appeal case, which upheld liquidators’ duty to adjudicate a contingent claim in an MVL. If a debt’s amount is uncertain or contingent on an ongoing legal case, the liquidator must make a genuine and fair estimate of that liability for the purpose of the MVL. Simply ignoring a disputed claim isn’t an option.
• Unresolved disputes may force a CVL conversion: If a liquidator chooses to wait for the outcome of litigation or cannot complete the adjudication of a claim within the 12-month timeframe, the company will effectively fail the “paid in full within 12 months” test. The judgment noted that a contested debt that cannot be definitively resolved and paid (including through any appeals process) within the one-year window means it hasn’t been paid in that period. In such cases, the MVL must be converted to a CVL. The judge observed that appeals and protracted litigation often exceed 12 months, making an MVL inappropriate for companies facing such uncertainties.
• Liquidator’s duty to convert is mandatory: Section 95 IA86 obliges the liquidator of an MVL to convert it into a CVL if “at any time” they form the opinion that the company won’t be able to pay its debts in full (with interest) within the 12-month period. The court stressed this isn’t discretionary – if the payment condition is no longer satisfied, the liquidator must promptly initiate conversion to a CVL. 
• No hindsight or extensions beyond the statutory period: The assessment of whether all debts can be paid within 12 months is to be made on the facts as they stand during the MVL, especially as the deadline approaches. The court cautioned against using hindsight or subsequent events to justify extending an MVL improperly. For instance, even if a company unexpectedly receives a large payment or funding after the 12-month period, that cannot retroactively cure the failure to meet the statutory timeframe. The conversion decision should be based on information available before or at the expiry of the 12 months.
• Expenses and costs count too: Importantly, the judgment underscored that the expenses of the liquidation itself are obligations that must be covered within the same 12-month period. Even if a company’s creditor debts could be paid, an inability to pay the liquidators’ fees and costs of winding up in full within 12 months would also trigger a required conversion to CVL. 

Implications for Insolvency Practitioners (IPs) and directors

For IPs undertaking MVL appointments, this judgment serves as a cautionary tale and a clear directive. The court’s firm stance reinforces that MVLs are only suitable for companies that are unquestionably able to settle all their obligations within the 12-month period. 

IPs and their staff should therefore consider the following:

• Careful viability assessment before MVL: A rigorous evaluation of a company’s financial position and potential liabilities should be undertaken before accepting or proceeding with an MVL. This includes investigating any contingent or disputed debts. If there is any significant uncertainty about a claim (for example, pending litigation or tax assessments), then consider carefully whether an MVL is appropriate. As the court made clear, an MVL isn’t a viable route if there’s doubt about meeting the 12-month payment requirement.
• Include contingent liabilities in planning: All known or foreseeable liabilities, even if contested or not yet crystallised, must be factored into the solvency equation. IPs should document a reasonable estimate of such debts (taking a “genuine and fair assessment” approach as per the judgment). If a large contingent claim exists, consider whether it can be resolved quickly. If resolution (through adjudication or negotiation) seems likely to extend past 12 months, it may be prudent to commence as a CVL from the outset or be prepared to convert later. In the case at hand, the attempt to ignore a £14m+ disputed claim to keep an MVL going wasn’t upheld by the court.
• Monitor the 12-month timeline closely: Once an MVL is underway, IPs must actively monitor the progress of asset realisations, claim adjudications, and payments to ensure everything can be concluded within the statutory period. Keep an eye on the calendar – if the deadline is, say, June 2026, plan backward for when final distributions must be made. If it becomes clear at any point that the 12-month deadline will be missed for any reason, the IP is obligated to initiate conversion to CVL without delay. 
• Communicate with stakeholders: The prospect of converting an MVL to a CVL can be contentious, especially from the perspective of shareholders (who typically initiate an MVL expecting a solvent wind-up). IPs should communicate early with shareholders and creditors about any emerging issues. Being transparent about the company’s status and the statutory obligations can manage expectations and reduce challenges. 
• Be ready to convert (and manage the transition): Converting to a CVL involves additional steps and altering the basis of the liquidation. IPs should be prepared procedurally and logistically to move to a CVL. While an MVL to CVL conversion might feel like a setback, it’s a necessary step to comply with the law and ensure creditors are treated fairly when full solvency within 12 months can’t be achieved. Practitioners should note that even post-conversion, their actions during the MVL (e.g., delay in adjudicating claims) could be scrutinised, so acting in good faith and in compliance with the statutory duty is paramount.

For directors, they need to ensure that they have undertaken full and rigorous consideration of all debts, including contingent and disputed debts, when preparing the statutory declaration of solvency. Making a declaration of solvency without having reasonable grounds to confirm that all debts can be paid within the 12-month period would render a director to be liable to imprisonment, a fine or both under section 89(4) IA86.

Conclusion

The High Court’s ruling in this case underlines that MVLs come with a non-negotiable 12-month countdown. IPs must approach MVLs with the mindset that time is of the essence for settling all debts. The judgment reinforces the need for diligence: From pre-liquidation assessments of solvency to post-appointment decision-making. In practical terms, an IP handling an MVL should err on the side of caution — if there’s any doubt about paying every creditor (and covering all costs) within a year, an MVL may not be the right choice.

Where an MVL is already in progress, when surprises emerge), the path is clear: Address the claim promptly and if it cannot be resolved and paid out swiftly, don’t hesitate to convert to a CVL. This ensures compliance with insolvency law and upholds the principle that creditors’ rights to timely payment trump the shareholders’ preference for a quick solvent liquidation. The case at hand highlights that courts will enforce these rules strictly – liquidators have a duty to the court and creditors to act when the solvency test can no longer be met.

IPs and directors should consider timings relating to MVLs. One way to minimise the risk of coming up against the 12-month period deadline is to ensure that as many aspects of the company are tidied up before passing the winding up resolution. Minimising asset realisation and dealing with claims within the MVL should help ensure that the MVL timing requirements can be met more easily.

IPs and their firms should update their internal checklists and training to ensure everyone understands that the 12-month rule is absolute. In turn, this will help maintain trust in the MVL process as a tool for solvent wind-ups and avoid the pitfalls illustrated by this case.