In Noal SCSp & Ors v Novalpina Capital LLP, the Court clarified the scope of the "12-month rule" in a Members' Voluntary Liquidation (MVL).
Noal SCSp & Ors v Novalpina Capital LLP
ICC Judge Agnello KC held:
- To enter into an MVL, there must be a clear, demonstrable ability that the company is able to pay all debts (including interest) within the period declared under section 89 of the Insolvency Act 1986 (IA 1986), namely 12 months or less from commencement of the winding-up.
- Section 89 sets out a standalone test, separate from both the cash flow and balance sheet tests.
- Adjudication, and, where relevant, payment of disputed debts is required within the 12 month period.
- Where payment in full of all debts within the 12 months is not possible, an MVL is not appropriate. A Creditor's Voluntary Liquidation (CVL) should instead be considered.
- In an MVL, if debts remain unpaid after 12 months, the liquidator has no discretion to extend this period – even if payment is imminent. MVLs may continue beyond 12 months, but only where all debts have been paid within the 12 month period.
Consequences
This decision suggests MVLs are suitable only where a company can realise sufficient assets or has sufficient cash to pay all debts within 12 months. Uncertainty or unqualified liabilities may preclude an MVL.
The consequences of this decision suggest that IPs should:
- Make an initial assessment to ensure directors' declarations under section 89 IA 1986 are made honestly and based on full disclosure of all liabilities – including contingent or disputed debts, and payment is likely within 12 months.
- If full debt repayment within 12 months is doubtful, consider a CVL from the outset, or wait until this timescale can be met.
- Maintain continuous oversight and track the progress of payments to creditors over the declared period. If at any point this becomes unlikely, act promptly under section 95 IA 1986 to convert to a CVL.
Guidance IPs
We understand that permission to appeal has been sought. In the meantime, office holders are considering ongoing MVL cases which have already exceeded 12 months. The ICAEW, ICAS and the IPA have issued joint guidance that IPs should review any existing MVLs with outstanding debts to ensure there are sufficient assets to settle the debts, plus statutory interest, and suggest a pragmatic approach in connection with these existing MVLs and that office holders need not be concerned about regulatory action.
Where existing MVLs do not have sufficient assets, the guidance is that IPs should take steps to convert the MVL to a CVL in accordance with sections 95 and 96 IA 1986.
For new MVLs, IPs should carefully consider the timing of the commencement of the MVL.
IPs should stay alert for further technical updates and professional guidance following the outcome of the application for permission to appeal.
