A recent High Court judgment* has confirmed the “12-month rule” in Members’ Voluntary Liquidations (MVLs) is a strict requirement, not a flexible guideline based on general solvency.
To enter MVL, directors must declare that a company can pay all its debts, with interest, in full within a period not exceeding 12 months. Once in liquidation, if all of the company’s debts cannot be paid in full within this timeframe, the liquidator must convert the MVL to a Creditors’ Voluntary Liquidation (CVL).
This can cause practical issues where, for example, there are assets that need to be realised to pay the company’s debts, whether by way of sale or pursuing claims against the company’s debtors. Further claims against the company may also be raised by creditors after the commencement of an MVL, which the liquidators will need to adjudicate on. This may not be a simple process.
Background
In this case, shortly after the company entered MVL with stated assets of under £100,000, a creditor issued a claim in Luxembourg which they valued between £14m and £247m. The company’s directors and shareholders disputed the debt. The original liquidator opted to wait for the outcome of the Luxembourg proceedings rather than adjudicate the claim himself. He also considered converting the MVL to a CVL. The shareholders replaced the original liquidator with a new one, who, based on two legal advice reports indicating low prospects of success for the Luxembourg claims, valued the claim at zero without initiating the formal adjudication process under Rule 14 of the Insolvency (England and Wales) Rules 2016 (IR16).
This assessment was disputed by the claimant and the Luxembourg litigation continued. The new liquidator nevertheless determined that the company was solvent, on the basis that sufficient funds were retained to pay the company’s creditors, and could remain in MVL. Creditors had not however been paid, and the claimant applied for the MVL to be converted to a CVL pending the outcome of the Luxembourg litigation.
12-month rule
The Judge had to decide the scope of the 12-month rule, and the judgment provided a rigorous assessment of the relevant statutory provisions.
- The 12-month rule means payment, not just solvency: the core of section 89(1) IA 86, which triggers an MVL, requires that directors declare 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 winding up. This isn’t only about whether assets cover liabilities in the long run; it’s about the company’s ability to actually pay those debts within that strict timeframe.
- “All debts” includes contingent and disputed debts: the requirement to pay “all its debts in full” is comprehensive. This includes contingent and prospective liabilities, such as claims subject to ongoing litigation, and even disputed debts.
- Contingent debts must be valued: If a debt’s value is uncertain (e.g., a pending legal claim), the liquidator must estimate its value. This valuation must be a “genuine and fair assessment” of the chances of the liability occurring – the Court referred to the case of Re Danka Systems plc [2013], a Court of Appeal case which held the liquidators had correctly adjudicated on a contingent debt and the MVL was not disrupted. Where a liquidator opts to await the outcome of litigation rather than adjudicate, they may have to convert the MVL to CVL if the litigation would not be complete inside the 12-month window.
- Disputed debts cannot be ignored: A debt that is disputed, or one whose adjudication process (including potential appeals) under 14.8 IR16 cannot be completed within the 12-month window, means it will not have been ‘paid’ within that period. This will trigger the requirement to convert to a CVL. The Judge noted that the appeal process would often take longer than the 12-month window, making MVL inappropriate in such cases.
- Liquidator’s duty under section 95 IA86 is not discretionary: If, at any point, the liquidator forms the opinion that the company will not be able to pay its debts in full (with interest) within the 12-month period (or shorter period specified in the section 89 declaration), they must convert the MVL to a CVL.
- No hindsight: The assessment for conversion must be made at the relevant time (before or at the expiry of the 12-month period). Subsequent events, like new funding agreements or VAT refunds, cannot retroactively justify prolonging the MVL if the 12-month test was failed.
- Expenses matter: Even if a company could theoretically cover its debts, if it cannot pay its liquidation expenses in full within the 12-month period, a conversion to CVL is required.
Key takeaway for insolvency practitioners
If there’s any doubt about settling all liabilities (including expenses) within the specified 12-month timeframe, MVL is not the appropriate process. Liquidators must also be mindful that, if they are not in a position to adjudicate on all debts, including contingent and disputed debts, to allow all creditors to be paid within the 12-month MVL period, then the law requires that the MVL must be converted to a CVL.
* NOAL SCSP & Ors v Novalpina Capital LLP & Ors [2025] EWHC 1392 (Ch) (06 June 2025)