What are contingent liabilities in a Members’ Voluntary Liquidation (MVL)?
A contingent liability refers to a potential debt that a company may face depending on the outcome of a pending court proceeding. In simpler terms, the liability’s existence depends on a future event. In an MVL, which relies on the company’s solvency, these potential future liabilities must be considered when determining the company’s solvency during liquidation.
Members’ Voluntary Liquidation and Contingent Liabilities
A Members’ Voluntary Liquidation (MVL) provides an efficient method to conclude the operations of a solvent company that is no longer required.
To initiate an MVL, the company directors must swear a Declaration of Solvency. This legal document confirms that the directors have thoroughly reviewed the company’s assets and liabilities, encompassing contingent and prospective liabilities. They affirm that the company is indeed solvent and capable of repaying all current debts, including statutory interest, within a period not exceeding 12 months from the proposed date of liquidation.
What are Contingent Liabilities?
A contingent liability refers to a potential debt that a company might face depending on the outcome of a forthcoming court proceeding. In essence, the existence of this liability hinges on a future event.
Although the debt is not present at the time, such potential liabilities must be factored in when assessing whether a company is insolvent (unable to settle bills with no hope of recovery) or solvent (capable of repaying debts promptly). Failing to consider these liabilities can lead to complications during liquidation if the company is later found to be insolvent after a Declaration of Solvency has been signed.
Read More:
- What is Business Asset Disposal Relief in an MVL
- Solvent Liquidation: Advice for Shareholders and Directors
- What is a Distribution in Specie
- How much does a Members’ Voluntary Liquidation cost
- MVL vs Strike Off: Options for Solvent Companies
Contingent Liabilities: The Transformation of an MVL to a CVL
In a Members’ Voluntary Liquidation, failure to consider contingent liabilities beforehand can pose significant issues. Neglecting such potential debts may necessitate converting the MVL into a Creditors’ Voluntary Liquidation (CVL) if the company is, in reality, insolvent.
Making a false Declaration of Solvency is considered perjury and can result in directors facing fines or even imprisonment in some cases.
Throughout a Members’ Voluntary Liquidation, the appointed liquidator oversees the distribution of the company’s realised assets. It is legally mandated that the liquidator ensures the company remains solvent throughout the MVL, even after processing contingent claims from creditors through the Court. Additionally, the liquidator must assess all company liabilities to ascertain whether asset realisation will cover all current and potential debts.
Contingent liabilities may become relevant if a creditor submits a claim to the Court seeking repayment for a disputed or unresolved debt. If the Court favours the creditor’s claim, the debt is factored into the overall balance of the liquidation account, which holds the proceeds from the liquidation sale.
If you have any inquiries regarding contingent liabilities or any other aspects related to business insolvency and recovery, don’t hesitate to reach out to us for free, confidential advice. You can also contact our directors’ hotline for immediate assistance. With an extensive network of over 100 offices, we provide confidential director support throughout the UK.
I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.