Ricoh Europe Holdings BV & Ors v Spratt & Anor

A liquidator must give a contingent debt a genuine and fair present value by assessing realistically the likelihood that the contingency will occur. Neither the existence of a contractual indemnity nor the company’s solvency requires valuation on a worst-case basis.

Once a contingent claim has been admitted and valued under the Insolvency Rules, the liquidator has no legal duty to retain assets sufficient to meet the contingency in full. The liquidator may distribute the surplus to members on the basis of the debts admitted to proof. The company’s liabilities for the purposes of section 107 of the Insolvency Act 1986 are those determined through the statutory proof and valuation process.

Ricoh acquired several European companies under a sale agreement containing seven-year indemnities against pre-completion tax liabilities. When the vendor entered a solvent members’ voluntary liquidation, Ricoh proved for crystallised and contingent indemnity claims. The liquidators valued the contingent claims under the Insolvency Rules and proposed to distribute the remaining assets.

Ricoh applied under section 112 of the Insolvency Act 1986 for a retention sufficient to meet the claims on a worst-case basis. Alternatively, it challenged the valuations. HH Judge Pelling QC rejected the application, holding that the statutory scheme required valuation and did not permit the proposed extra-statutory retention.

The appeal concerned whether a residual power or duty to retain assets remained after valuation and whether an indemnified contingent claim had to be valued on a worst-case basis.

1. Appeal dismissed unanimously. Once Ricoh’s contingent claims had been proved, valued and admitted, the liquidators had no legal duty to retain sufficient assets to meet the possible liabilities in full. They were entitled to distribute the surplus to members on the basis of the debts admitted to proof.

2. Section 107 of the Insolvency Act 1986 gives creditors priority over members but does not prescribe the procedure or timetable for determining liabilities. In that provision, the company’s liabilities mean liabilities determined through the proof and valuation machinery of the Insolvency Rules. Otherwise that machinery would serve no useful purpose.

3. Rule 4.86 requires the valuation of any contingent debt. The statutory scheme assumes that every such claim is capable of valuation. A company may complete a voluntary winding up despite future or contingent obligations. It need not establish a fund sufficient to satisfy every contingency if it eventually occurs. Re House Property and Investment Co Ltd [1954] 1 Ch 576 and Re Forte’s (Manufacturing) Ltd [1994] BCC 84 supported that conclusion.

4. The valuation must be a genuine and fair assessment of the likelihood that the liability will arise. The liquidator should use appropriate expertise, make a realistic assessment and account for material factual changes. A worst-case valuation would confer a guaranteed return upon the contingent creditor and could be unfair to the company, other creditors and members.

5. The contractual character of the claims as indemnities did not alter the valuation exercise. Although an indemnity transfers the relevant risk contractually, rule 4.86 requires the liquidator to value the current risk of the underlying event. The same valuation principles apply in solvent and insolvent liquidations.

6. A liquidator may sensibly await an imminent contingency before undertaking valuation, and an estimate may be revised before completion of the liquidation. Those possibilities did not assist Ricoh because the relevant contingency remained about a year away and the claims had already been valued. The liquidators’ approach disclosed no error of principle.

1. Court of Appeal (Civil Division): The court unanimously dismissed the appeal in [2013] EWCA Civ 92, affirming the rejection of both the proposed retention and the challenge to the liquidators’ valuation approach.

2. High Court, Chancery Division, Companies Court: HH Judge Pelling QC held that, after proof and valuation of the contingent debts, the statutory liquidation scheme did not permit the proposed retention pending crystallisation. No citation for that decision is stated in the judgment.