OnHand Counsel

Corporate and Commercial Solicitors

Seller’s members voluntary liquidation can bugger up buyer’s chance of recovery under indemnity: recent case

September 2013

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A buyer will always be concerned about the risks of a seller going bust, because warranties and indemnities are only worth what the seller is eventually able to pay.  But in this recent case the buyer was put at risk of not recovering under a tax indemnity even though the seller was meant to be solvent

The seller had given a tax indemnity in the sale agreement. After the deal was done a tax investigation was started, and it seemed likely that the seller would end up having a liability under the indemnity, although the full amount wouldn’t be known until quite some time later once the investigation was completed

The seller was placed into members voluntary liquidation. This procedure is only available to companies which are fully solvent. The directors can generally decide who they want to appoint as liquidators.

The buyer proved in the liquidation for the maximum amount that it thought it might end up being entitled to under the tax indemnity. The liquidator admitted the claim to proof but gave it a much lower figure. The liquidator was then going to distribute the assets of the company based on that lower liability. So the buyer was going to have to take the risk that it might not end up receiving the amount it should be entitled to under the indemnity. (On the other hand, it took the benefit of the much smaller risk (liquidators don’t give much away) that the final tax liability might actually end up being less than it recovered from the liquidator.)

The Court decided that the liquidator had to act in this way, and in the circumstances had valued the contingent claim properly and fairly. The liquidation procedure is there to help things to be wrapped up quickly, so you can’t force a liquidator to hang around waiting for contingent liabilities to sort themselves out. But this might seem a bit fairer if the company was actually insolvent.

So, one more thing for buyers to factor into their thinking when assessing risks and structuring deals. Not a lot they can do about it though? Look into indemnity insurance? Get guarantees/covenants from the sellers’ owners that they won’t wind the seller up?

Case: Ricoh Holdings BV v Spratt & Anor 2013.

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