UK: Treatment Of Contingent Claims In Voluntary Liquidation

Last Updated: 30 October 2013
Article by Daniel Moore

Re: Ricoh Europe Holdings BV (& Others) – v – the Joint Liquidators of Danka Business Systems Plc


Danka Business Systems Plc ("Danka") was placed into members' voluntary liquidation ("MVL") on 19 February 2009.

Certain creditors of Danka ("the Creditors") applied to Court concerning the treatment of their contingent claims in the MVL.

Prior to the MVL, the Creditors purchased the issued share capital of a group of companies from Danka and others. As part of the sale and purchase agreement in relation to the shares, Danka agreed to indemnify the Creditors in respect of the tax liabilities of the acquired companies arising from periods prior to the completion of the share sale. The tax indemnities were given for a period of 7 years and Danka was placed into MVL before the 7 year period expired.

Within a month of the MVL, the liquidators gave notice under rule 4.182A of the Insolvency Rules 1986 ("IR86") setting a deadline for the submission of proofs of debt. The proof of debt lodged by the Creditors was comprised partly of crystallised liabilities and partly contingent tax liabilities. All of the tax liabilities arose from the tax indemnities provided by Danka.

The Creditors' claim

The Creditors' primary case was that the liquidators of Danka should not proceed to a final distribution of surplus cash to members without setting aside a ring-fenced fund to cover the Creditors' contingent tax claims in full (i.e. the claims arising under the 7 year tax indemnities).

The Creditors' position was that Danka had given a full tax indemnity and that the outcome of the liquidation for the Creditors was that Danka was seeking to extricate itself from its contractual liabilities, whilst at the same time retaining the consideration paid by the Creditors for the issued share capital purchased.

Before reaching the Court of Appeal, the High Court held that once a contingent creditor had lodged a proof in the liquidation for its debts and they had been valued, the statutory regime did not provide for the liquidators to delay a distribution to members pending the crystallisation of contingent liabilities (i.e. providing a ring-fenced fund).

The Issues on Appeal

The Creditors' appeal focused on the following points:

  • the liquidators should provide for a reserve against future contingent liabilities arising in relation to the tax indemnities and that the value should be calculated on the maximum value of the tax indemnities prior to distributing any funds to members; and
  • the liquidators should have based the valuation of the contingent liabilities on the worst case scenario basis (recognising the nature of the indemnity), in order to insure the Creditors against the relevant tax liabilities.

In dismissing the appeal, the Court of Appeal held that the liquidators were not obliged to set aside a fund to meet those contingent claims in full. Further, the contingent claims were to be dealt with in accordance with rule 4.86 IR86, which provides for liquidators to estimate the quantum of contingent claims. The Court of Appeal said the issue of fairness is not relevant to these proceedings and the question is how such claims are to be addressed within the statutory regime applicable to the liquidation (i.e. rule 4.86 IR86).

The Court of Appeal stated that any valuation of a contingent liability must be based on a genuine and fair assessment of the chances of the liability occurring. The liquidators must make a current assessment of the risk of the contingent event occurring and the nature of an indemnity is relevant to the assessment of that outcome. The Court of Appeal stated that there is nothing in rule 4.86 that requires the liquidator to guarantee a 100% return on an indemnity by assuming a worst case scenario in favour of the Creditors.


Although the Court of Appeal stated that the liquidators were not obliged to set aside a fund to meet contingent claims, the Court of Appeal did envisage a scenario whereby liquidators could justify postponing a distribution pending the crystallisation of a contingent liability. However, liquidators would need to be able to demonstrate the commercial advantage of taking such action (for example, obviating the need to expend time and resources on a valuation exercise).

The existence of contingent liabilities does not preclude a company being placed into MVL and is not a reason for a liquidator to legitimately delay a distribution to members.

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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