Key points

  • How to deal with contingent claims in a liquidation;
  • A contingent creditor may not be entitled to stop a liquidator making a distribution particularly where the contingency is not imminent.

In liquidation, where creditor claims (including contingent claims) have been valued, the liquidator may proceed to make a distribution to creditors in full, rather than await the contingency or hold back a reserve fund from distribution.

The facts

In 2006, certain companies in the Ricoh group ("Ricoh") purchased the share capital of various businesses and Danka Business Systems plc ("Danka") agreed in the sale and purchase agreement to provide various tax indemnities (the "Indemnities"), limited to a seven year period.

Subsequently in February 2009, Danka entered members' voluntary liquidation and the liquidators invited proofs of debt to be submitted by 28 April 2009. Ricoh proved in the liquidation for the full value of what it considered to be the highest possible claims under the Indemnities. Such claims were largely contingent however. For example, some of the claims were subject to tax audit or revenue investigation in various jurisdictions.

Ricoh requested that the liquidators: 1) delay the intended distribution to creditors to await the crystallisation of the contingent liabilities under the Indemnities; and 2) maintain a sufficient reserve of funds to be able them to satisfy Ricoh's highest valuation of their contingent claims.

The liquidators proceeded to value Ricoh's claims (using the mechanism for valuing contingent claims in Insolvency Rule 4.86). Ricoh calculated that a reserve of €11,886,695 was necessary to meet potential tax exposures (in the worst case scenario) whereas the liquidators valued the contingent liabilities at €268,961. By the date of trial, Ricoh were seeking a reserve of €1,979,746. By the date of the judgment that had reduced further to €331,864.

Decision

The court sided with the liquidators' approach. They could find no basis to delay the payment of a dividend once the creditors' claims had been valued. It accepted by the court that there could be cases where the contingency is so imminent that the liquidator could sensibly wait for the event, rather than spending time and money in valuing the chances of the claim materialising. However, even by the trial date the Indemnities would not expire for a further year. The court found no legal duty for the liquidator to wait for that period of time. As regards the approach to valuation, Lord Justice Mummery said, "...the liquidator is not, in my opinion, required simply to wait and see. That is the opposite of valuation." He is required to make a genuine and fair assessment of the chances of the contingent liability occurring.

Comment

It is easy to see why Ricoh would have felt aggrieved in 2009. Danka was solvent and intending to distribute its assets to creditors and members, making the Indemnities worthless thereafter.

Ricoh's challenge to the liquidators' conduct was limited to their decision not to delay a distribution to creditors and members in the context that Ricoh had engaged with the process of proving of debts and creditor claims had been valued.

It remains to be seen whether they would have been successful in challenging the decision to commence the process of proving of debts (to await the contingency). To avoid such disputes, purchasers taking the benefit of indemnities might seek to require an undertaking from directors or shareholders not to take steps to liquidate the selling entity before the expiry of the indemnity period.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.