Treatment Of Contingent Claims In Voluntary Liquidation

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

Facts

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...