UK: Members’ Voluntary Liquidation: The Valuation Of Contingent Debts

Last Updated: 3 May 2013
Article by Helen Matthews

Where a solvent company goes into liquidation voluntarily its creditors can expect to recover everything due to them. But what happens if a creditor's claim is contingent? In the case of Ricoh Europe Holdings BV and others v Spratt and another [2013] EWCA Civ 92 (19 February 2013) the Court of Appeal rejected a contingent creditor's attempt, in a solvent, members' voluntary liquidation, to force the liquidator to make a provision to ensure payment of the maximum potential amount of the creditor's claim upon crystallisation.

Legal Background

A creditor is able, in most cases, to prove in the liquidation of a company even if it cannot set a definite value on the claim, because that is dependent on a process which is incomplete at the time the company goes into liquidation. The Insolvency Rules 1986 (SI 1986/1925) (IR 1986) contain a mechanism to enable any contingent element of a creditor's claim to be valued. This mechanism applies both in compulsory and voluntary liquidations. A liquidator must estimate the final amount of the creditor's claim and inform the creditor of that estimate, and this becomes the value of the creditor's claim for the purpose of receiving a distribution of the assets of the company. In some members' voluntary liquidations there is simply a return of assets to the company's shareholders; in other cases the liquidator must first pay claims to creditors. Where there is to be a distribution to creditors, the liquidator gives notice of the intention to make a final distribution to creditors and sets a date for submission of creditors' claims. Failure by a creditor to do so results in exclusion from benefiting from that final distribution. It is often the case that there will be just one distribution of assets in a members' voluntary liquidation. A creditor who fails to submit its claim to the liquidator can therefore lose its right to claim against the company.

Facts

In 2006 the Ricoh group (Ricoh) bought the Infotec group (Infotec) from Danka Business Systems Plc (Danka). As part of the purchase Danka indemnified certain Ricoh companies against the tax liabilities of Infotec in a number of European countries.

In 2009 Danka went into members' voluntary liquidation. Its liquidators declared an intention to make a single, final distribution to Danka's creditors and creditors were invited to submit claims. Ricoh submitted its claim, partly on the basis of the tax indemnity in the purchase agreement, the final valuation of which was contingent on the conclusion of an audit process taking place between Infotec and the relevant European tax authorities.

The final value of Ricoh's claim was estimated by Danka's liquidators at approximately €270,000, but Ricoh claimed that its total potential liability was some €11,800,000. The liquidators proposed using their estimated value of Ricoh's claim in the distribution to Danka's creditors. Ricoh sought a court order directing the liquidators to retain £11,000,000 to meet Danka's contingent liability under the indemnity, once the final value of Ricoh's claim was known.

Ricoh's argument was that, if the liquidators made the proposed distribution without retaining the proposed £11,000,000 Danka's total liability under the indemnity would effectively be compromised; Danka's contractual obligation was to provide a full indemnity and Ricoh argued that it would be inequitable for Danka to limit its obligation by entering into a members' voluntary liquidation in which it was implicit that all creditor claims should be discharged in full. The High Court refused Ricoh's application and it appealed to the Court of Appeal.

On appeal, Ricoh argued that:

  • The liquidators were not obliged to proceed with the distribution that quickly, but should have delayed declaring a final dividend until the completion of the tax audit, or retained a fund to satisfy Ricoh's claim in due course.
  • The liquidators had a discretion to delay making the distribution to allow the final value of Ricoh's claim to be determined.
  • Ricoh's claim should have been estimated based on Danka's total potential liability thus protecting Ricoh against the unfairness of losing the full tax indemnity benefit within a solvent liquidation.

In reliance on the High Court authority of Re R-R Realisations Ltd [1980] 1 WLR 805, Ricoh argued that a liquidator's obligation to carry out a liquidation process with diligence and efficiency was tempered by an overriding obligation to be fair to the creditors of the company in question.

Notwithstanding Ricoh's arguments the Court of Appeal unanimously dismissed its appeal.

Court of Appeal Decision

The Court of Appeal did not accept Ricoh's arguments and distinguished its case from Re R-R. In that case a creditor made a late claim in the liquidation but this was alegitimate claim and there were good reasons for the lateness; accordingly it had been unfair to exclude the creditor from sharing in the distribution. Ricoh, on the other hand, had participated in Danka's distribution procedure and its claim had been processed according to the Insolvency Rules and in line with the liquidators' responsibility to distribute Danka's assets within a reasonable time.

In some cases it might be appropriate to delay a distribution pending final determination of a contingent claim, if this was imminent. In Ricoh's case the value was unlikely to be known until the indemnity expired in a year's time, hence there was no basis on which the liquidators should be ordered to delay declaring or distributing the assets.

Neither was there any duty under the Insolvency Rules for the liquidators to create a retention fund to deal with Ricoh's claim; the mechanism for determining claims and distributing assets set out in the Insolvency Rules was comprehensive. As the liquidators had followed the statutory mechanism for dealing with contingent claims in a reasonable timescale there were no grounds upon which the court should interfere with that procedure.

The liquidators had also carried out a proper estimation of the contingent element of Ricoh's claim so there was no basis for the court to interfere with the distribution process.

Despite Ricoh losing the full benefit of Danka's indemnity it was held that the object of the Insolvency Rules' mechanism was to allow a liquidation to proceed as efficiently as possible rather than to achieve a fair result for each creditor. Contingent creditors were allowed to claim in a liquidation to prevent the liquidation process being delayed pending the crystallisation of the contingency; the liquidator could not be put under a duty which would effectively defer the progress of the liquidation upon reliance on contingent events. The liquidators' duty was to carry out an active and independent estimate of Ricoh's claim.

The court said that the same valuation rules must apply in the same form to both solvent and insolvent liquidations. It would not be appropriate to allow a creditor's contingent claim to be inflated by a lack of rigorous estimation, as it would dilute the return to other creditors (in an insolvent liquidation) and the members (in a solvent liquidation). Accordingly, the liquidators could not, as Ricoh argued, simply allow Ricoh's estimates to stand, so as to prevent Ricoh from suffering the loss of the full tax indemnity. The nature of the contractual indemnity was irrelevant to the liquidator's assessment of the underlying contingent claim.

Comment

This decision confirms that a members' voluntary liquidation can, effectively, compromise a contingent claim against the company, notwithstanding that this is generally regarded as a process in which creditors receive full payment. The procedure provides finality, but at a cost to creditors with contingent claims.

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.

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