Is the Company solvent?
This is the primary question a Board must ask itself before embarking on a programme of solvent winding up. The test of solvency in a solvent winding up is whether the Company is able to meet its debts in full within 12 months of the date of liquidation, plus any interest that may be due on those debts. This can include interest to which the creditor is entitled on the debt to the date of liquidation, plus interest on the debt after liquidation at the judgement rate, or 8 per cent.
Assuming that the Company is able to meet this test by reference to the latest management accounts, what about the existence of contingent liabilities, and how does the Board get around that issue when making a solvency declaration?
A contingent claim such as the one in our case study might exist where a dispute arises relating to a liability, or a claim from a creditor is not yet liquidated owing to the non-crystallisation of a potential future obligation. The Board should recognise the debt as a contingent liability when making the declaration of solvency. It is not due for payment or considered due at the date the declaration is made, but there is the potential for it to become due in some way, in time. In addition, the amount payable could be considered to render the Company insolvent.
Does that mean the declaration cannot then be made?
The answer to that question lies in the judgement of the Board in making the declaration. A majority of the Board must make the declaration and so must be confident the Company is able to deal with its debts, plus interest owing on those debts, to meet the test of solvency. If there is any risk that the contingent claim will be material enough to put the test at risk, one way of overcoming the problem might be to seek an indemnity from another, asset-rich, group company to cover this risk.
The indemnity could provide for full payment of the debt, whatever the amount, should the claim ever materialise in the winding up and be assessed by a liquidator. Even if the claim is potentially insured, the indemnity option ought to be considered since the primary obligor is the Company. It should also cover the costs of dealing with the claim. The indemnity would in effect be covering the Company’s liability to meet the obligation to pay and would be entered into between the indemnifier and the Company.
What if the Board is not confident an indemnity will provide them with sufficient confidence?
The Board should take legal advice and could seek a ‘letter of comfort’ setting out why they can rely on the indemnity from the group company. This might come from a solicitor advising them that treating the claim in this way would enable them to declare solvency. The letter might make reference to the credit rating and the most recent financial results of the indemnifier in providing the Board with the comfort it needs. The more indemnities which are available the better, of course!
Does this indemnity cover a liquidator then?
Not sufficiently. Whilst the indemnity does give the Company comfort – comfort a Board can rely upon when declaring solvency – a liquidator is not afforded the same protection. A liquidator would seek a similar indemnity himself when accepting the appointment so that he is personally provided with indemnity cover should claims exceed assets.
ReSolve has had experience of working in a number of large Group situations where such an indemnity has been provided. We work with a number of specialist legal firms that have provided such documentation and are able to support Boards and indemnifiers in ensuring the test of solvency is met.
Whatever the reason for your corporate simplification requirements, ReSolve has the experience, qualifications and know-how to ensure you are dealt with professionally, attentively and expeditiously bringing about the outcomes you desire.
For a confidential, no obligation conversation to discuss your options, get in touch here or call Ben Woodthorpe on 020 7702 9775.
The above is for guidance purposes and ReSolve or its employees cannot accept any liability whatsoever for loss, damage, cost or expense incurred as a result of action taken in reliance of the contents of this guide or any matters arising there from.