In his latest Coffee Break Briefing, insolvency & restructuring expert Malcom Niekirk covers what happened in the Novalpina case and how it might affect you.
You can watch the full video here...
What happened in the Novalpina case?
The case is about when an MVL (a solvent, members’ voluntary liquidation) should convert into a CVL (an insolvent, creditors’ voluntary liquidation). The answer is this. Sooner than many practitioners previously thought. We may now see some liquidators dealing with solvent CVLs.
Background; what happened?
Novalpina went into MVL in May 2023, with net assets of around £148,000. A lot of this value came from debtors that were then thought to be good.
By October a creditor had launched proceedings in Luxembourg. Its claim was somewhere between €14.4 million and £287 million. The liquidator assessed the claim as worthless. The High Court disagreed.
The matter reached court in June 2024. Debtors then were proving difficult to collect. The company’s asset position had weakened. Liquidation costs had used up available funds. A third party had stepped in to cover liquidation costs. The judge ruled that the MVL had to convert into a CVL.
This was the reason. The company had not paid its creditors in full within 12 months from the start of the MVL.
Which parts of the Insolvency Act are relevant?
Two sections of the Insolvency Act 1986 were key.
What is Section 89?
Before the MVL starts, directors must sign a declaration of solvency, to confirm the company can pay all its debts in full within 12 months. The declaration is valid for five weeks. (They can sign a new one, if it expires before the MVL opens.)
That defines the liquidation as an MVL. It’s a CVL if there is no declaration of solvency.
Suppose debts are not paid within 12 months? Then directors may be prosecuted, unless they can show they had reasonable grounds when making the declaration.
What is Section 95?
Section 95 applies during a MVL, when the liquidator first thinks that the company will not pay its debts in full within 12 months.
In that case the liquidators must act quickly. They must produce a statement of affairs within seven days. They must convert the MVL into a CVL liquidator withing 28 days.
How did the court interpret the 12 month rule?
The Novalpina judgment is clear. The 12 month rule is absolute. When creditors – even if its only one – are not paid within this time the MVL must convert to a CVL. Even £1 left unpaid is enough to trigger conversion.
Liquidation expenses count as debts. If they cannot be paid from company assets, conversion is required, even if someone else covers the cost. (The Novalpina decision did not turn on this point, so this remains questionable.)
Contingent or disputed claims must be valued properly. Simply putting them at zero is not acceptable. Proper valuation might include having a full, argued court hearing to reach a final decision.
How binding is the Novalpina decision?
It is a High Court decision. This means that, technically, other High Court judges are free to come to a different conclusion on similar facts. But, the judgement is detailed and fully reasoned. That makes it highly persuasive.
It may be appealed. But the judgement follows the wording of sections 89 and 95 very closely. For now, it may be safest to assume that the Novalpina decision is binding.
What should practitioners do with MVLs now open?
With current MVLs, practitioners should?
- Review older MVLs, especially those over, or approaching, 12 months.
- Pay creditors promptly, if funds are available.
- Keep directors and shareholders informed about the risk of conversion.
What about the future?
For new MVLs, practitioners should:
- Review engagement terms.
- Review their pre-appointment checks.
Where necessary, take legal advice.
What are the wider implications?
The case raises some wider concerns for MVLs:
Creditors using delay as leverage
Creditors may try to drag matters out past the 12 month point to force conversion into a CVL, giving them greater influence over conduct of the liquidation. On conversion, they may be able to choose who is the new liquidator.
Disputed claims need to be resolved quickly
Disputed and contingent claims must be resolved quickly. Appeals or litigation could run beyond the 12 month cut off. That is likely to trigger conversion.
Shareholders lending to the company.
Shareholders may decide to lend money to the company. The company will use it to pay unconnected creditors. Then, when the MVL converts to CVL the shareholders will have replaced (as creditors) those creditors the company has paid. Thus, as creditors, the shareholders may be able to choose who is to be the new liquidator, in the CVL.
MVLs may be less useful in some cases.
MVLs have been useful in the past, as a way of crystallising liabilities and settling them, when the alternative might have been very protracted. This may now be rather more difficult because the MVL might have to convert into a CVL. And, in such cases, the CVL might give a hostile creditor effective control over the shareholders’ funds.
What is the key message?
The Novalpina decision makes one thing very clear. In an MVL, all creditors must be paid in full within 12 months. If that does not happen, whatever the reason, the MVL must convert into a CVL.
Specialist Insolvency Solicitors
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