Regulatory position statement on conversion of member voluntary liquidations

Following the recent High Court decision in Noal SCSp & Ors v Novalpina Capital LLP & Ors, ICAS, ICAEW and the IPA (the RPBs) have considered the regulatory approach to be adopted in relation to member voluntary liquidations (MVLs) which breach the “12-month rule”.

The decision and it’s background is set out in more detail in our article High Court reaffirms strict “12-month rule” for member voluntary liquidations. Since that article was published we understand that the judgement is being appealed. 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 Insolvency Practitioners (IPs) do in the meantime?   

From a regulatory and disciplinary perspective, given the pending appeal, the RPBs will be 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 1986. Wherever possible, creditors should be paid within 12 months of commenceme nt (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:

1. an MVL has existed for longer than 12 months (or the period in the s.89 declaration), or
2. creditors were not paid (or cannot be paid) within 12 months (or the period in the s.89 declaration), or 
3. 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, the RPBs will revisit this guidance.