Insolvency Practitioners Guidance for High Court Ruling on Members’ Voluntary Liquidations

Insolvency practitioners have been issued fresh guidance on the handling of members’ voluntary liquidations (MVLs) following a recent and unexpected judgment from the High Court of England & Wales.

At the end of August, the Institute of Chartered Accountants in England and Wales (ICAEW), the Chartered Accountants of Scotland (ICAS), and the Insolvency Practitioners Association (IPA) jointly released guidance responding to the decision, which has introduced a strict “12-month rules” for MVLs.

The Court’s Decision

In July, the High Court adopted a narrow interpretation of section 89 of the Insolvency Act 1986 (IA86). The ruling confirmed that a company in a solvent MVL must settle all of its debts within 12 months of the winding-up commencing, or else convert the process into a creditors’ voluntary liquidation (CVL). The court was clear that liquidators have no discretion to delay payments to creditors beyond that period.

This marks a departure from how MVLs have traditionally been managed. MVLs are typically used for solvent companies as they allow directors to retain greater control than under an insolvency process.

Insolvency Practitioners Guidance

Although the ruling is under appeal, the regulators said they had taken a “pragmatic approach” by issuing interim guidance for insolvency practitioners to help manage existing MVLs with unpaid debts.

Key points include:

• Liquidators should review ongoing MVLs with outstanding liabilities and confirm there are sufficient assets to meet all debts, plus statutory interest.
• If assets are insufficient, the MVL should be converted into a CVL.
• Where possible, creditors should be paid within the initial 12 month period – or within any shorter timeframe set out in the section 89 declaration.
• Practitioners should take professional advice where appropriate and ensure decisions are properly documented.

Importantly, the regulators also confirmed they will not pursue disciplinary action against liquidators who, for good reason, have not completed payments within the 12-month timeframe, provided that sufficient realisations exist to cover debts and interest.

Looking ahead

ICAEW, ICAS and the IPA confirmed that they will revisit and update their guidance depending on the outcome of the appeal. In the meantime, insolvency practitioners must navigate a more restrictive approach to MVLs, balancing compliance with section 89 against the practical realities of realising assets and settling debts.

Insolvency litigation funding options

Litigation funding, the assignment of claims and/or ATE insurance can play a pivotal role in assisting insolvency practitioners (IPs) in meeting their obligations. Insolvency practitioners involved in insolvency litigation can make use of the following methods:

After-the-event (ATE) legal insurance – ATE insurance is generally used to protect from adverse costs risks & Security for Costs requirements. After-the-event (ATE) legal expenses insurance is perhaps best thought as a similar to a ‘swap’. For either no upfront fee or a small upfront fee, the insurer takes on all of the risk of the potential adverse costs award.

The claimant has swapped their obligation to pay the defendants in the event of a loss, with the obligation to pay the insurer in the event of a win. This ‘swap’ is generally an attractive swap as the client is likely to be in a better financial position following a win than following a loss. Also, the payment to the insurer will only be a percentage of the adverse costs rather than the whole amount.

Third party litigation funding – In some cases, third party litigation funders may be willing to provide funding for a claim in exchange for a share of any financial settlement or damages awarded. This option can be attractive when there are no funds to pursue a strong case. ATE insurance is often used in conjunction with this type of funding.

Assignment of litigation – Some types of disputes can be assigned to a third party, usually for an upfront payment and a share of recoveries (after costs). This model can be useful on smaller cases when the ATE and CFA model would not deliver value. But giving up control can sometimes be costly, especially on larger disputes.

How can Annecto Legal assist?

When handling insolvency matters, insolvency practitioners are obligated to explore all options available in such cases. At Annecto Legal, we assist a wide range of clients in finding the appropriate insolvency litigation funding, assignment options and after-the-event (ATE) insurance.

Annecto Legal regularly assists licensed insolvency practitioners who are involved in dealing with MVLs and insolvency matters. If you are in the process of bringing or defending an insolvency dispute and want to find out whether we can assist in helping you fulfil your obligations and secure the right deal, then contact Annecto Legal now.