In re Danka Business Systems plc

The Court of Appeal dismissed the appellants' challenge to the liquidators' conduct of a members' voluntary liquidation. The court held that the Insolvency Rules require a liquidator to estimate the value of contingent debts (IR 4.86) once a creditor has proved and that there is no general duty on a liquidator in a solvent MVL to set aside a full worst-case reserve for contingent contractual indemnities prior to distributing the surplus to members. The court rejected the contention that the existence of an indemnity requires the liquidator to value the claim on a worst-case basis and held that a valuation must be a genuine, fair assessment of the likelihood of the contingency.

Key statutory provisions considered included Insolvency Act 1986 s.107 and s.112 and Insolvency Rules rr.4.82, 4.83, 4.84, 4.86 and 4.182A. The court applied established authority (including Re House Property and Investment Co Ltd and Re Forte's (Manufacturing) Ltd) to the effect that a solvent company may be wound up notwithstanding contingent liabilities, and that contingent claims are to be valued under the Rules rather than satisfied by an indefinite retention.

Background and parties:

• Ricoh were purchasers under a sale and purchase agreement who claimed tax indemnities from Danka Business Systems Plc. The company was placed into a members' voluntary liquidation with an anticipated surplus. Ricoh had both crystallised and contingent claims under clause 7.04 of the SPA.
• The liquidators gave notice under IR 4.182A proposing a final distribution and invited proofs of debt. Ricoh proved for contingent tax liabilities and asked the liquidators to defer distribution and ring-fence a large reserve to meet contingent claims.

Nature of the application:

• Ricoh applied under Insolvency Act 1986 s.112 for directions requiring the liquidators to retain or ring-fence approximately 911m (originally claimed) until contingent claims crystallised or to 31 January 2014, and alternatively challenged the liquidators' valuation of the contingent claims under IR 4.83.

Issues framed by the court:

1. Whether, once contingent claims had been proved and valued under the Insolvency Rules, the liquidators nonetheless had a residual discretion to delay a final distribution to members by making a retention sufficient to meet a worst-case assessment of contingent contractual indemnities;
2. Whether the liquidators' valuation under IR 4.86 was legally wrong because they did not adopt a worst-case valuation reflecting the indemnity.

Court's reasoning and conclusions:

• The Rules (in particular IR 4.86 and IR 4.182A) provide the mechanism by which contingent claims are proved and valued, and those valuations enable liquidators to complete distributions. The statutory scheme does not contemplate an open-ended extra-statutory retention to await contingencies; doing so would prolong liquidations and conflict with the policy that winding-ups be completed within a reasonable time (IA 1986 s.107).
• The authorities (including Re House Property and Investment Co Ltd, Re R-R Realisations Ltd and Re Forte's) support the proposition that a solvent company may be wound up notwithstanding contingent liabilities and that a liquidator is not obliged to set aside a fund to meet contingencies in full.
• Valuation under IR 4.86 must be a genuine and fair assessment of the likelihood of the contingency; the existence of a contractual indemnity does not require the liquidator to adopt a worst-case valuation that would guarantee a 100% return to the indemnified creditor. A valuation may be revised in light of material change.
• Applying these principles to the facts, the Court of Appeal was not persuaded that the liquidators had erred in principle in their valuation and dismissed the appeal.

Practical note: While recognising that MVLs can produce hard results for holders of contingent indemnities, the court confined the remedy to the statutory processes of proof, estimation and (where appropriate) court applications under the Insolvency Act and Rules.

This is an appeal. The appeal is dismissed. The Court of Appeal held that (1) once contingent claims have been proved the Insolvency Rules (in particular IR 4.86 and IR 4.182A) require a liquidator to estimate their value and there is no general duty to make an open-ended retention to meet a worst-case liability prior to distributing the surplus to members; (2) a valuation must be a genuine, fair assessment of the likelihood of the contingency and the existence of an indemnity does not compel a worst-case valuation; and (3) on the facts the liquidators did not commit an error of principle in their valuation.

Appeal from the High Court of Justice, Chancery Division, Companies Court (HH Judge Pelling QC), Case No. 3102/2010; heard in the Court of Appeal (Civil Division) and dismissed [2013] EWCA Civ 92.