Re Danka Business Systems Plc
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lord Justice Treacy:,Lord Justice Mummery |
| Judgment Date | 19 February 2013 |
| Neutral Citation | [2013] EWCA Civ 92 |
| Docket Number | Case No: A2/2012/0900 |
| Court | Court of Appeal (Civil Division) |
| Date | 19 February 2013 |
In the Matter of Danka Business Systems PLC (In Members' Voluntary Liquidation)
And in the Matter of the Insolvency Act 1986
[2013] EWCA Civ 92
Lord Justice Mummery
Lord Justice Patten
and
Lord Justice Treacy
Case No: A2/2012/0900
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT
HH JUDGE PELLING QC
3102/2010
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr David Chivers QC and Mr Alex Barden (instructed by Eversheds LLP) for the Appellants
Mr Peter Arden QC (instructed by Ashurst LLP) for the Respondents
Hearing date : 7th November 2012
The appellants (which, for convenience, I will refer to collectively as Ricoh) are creditors of Danka Business Systems Plc ("the Company") which is now in members' voluntary liquidation. The expected surplus in the liquidation exceeds US$66m. Ricoh's claims in the liquidation arise from various tax indemnities which were contained in clause 7.04 of a sale and purchase agreement (SPA) dated 12 th October 2006. It is unnecessary to set out the precise terms of the indemnities. A point of construction was taken in respect of them but that is now resolved. Under the SPA (which was completed on 31 st January 2007) Ricoh acquired the issued share capital of various companies which are incorporated in a number of European countries and the Company agreed to indemnify Ricoh in respect of the pre-completion tax liabilities of the companies it acquired except to the extent that those liabilities were included in the completion accounts and were therefore included in the calculation of the purchase price. The indemnities were given for a period of 7 years.
As a consequence, at the commencement of the liquidation in February 2009, Ricoh had both crystallised and contingent claims under the indemnities. The contingent claims consisted of potential tax liabilities in Germany, Italy, France and Spain. In some cases the prospect of a claim and its quantification depended on the outcome of a tax audit or investigation by the relevant revenue authority. Some of those had not commenced by the date of the liquidation. In other cases, they were incomplete.
The resolution placing the Company into members' voluntary liquidation was passed on 19 th February 2009. On 17 th March 2009 the liquidators gave notice to the creditors pursuant to IR 4.182A informing them that they proposed to make a final distribution to creditors and requiring them to prove their debts by 28 th April 2009. Ricoh responded by letter dated 22 nd April in which they set out details of the tax liabilities included under the indemnities with an estimate of the maximum value of the contingent claims. The letter requested the liquidators to defer taking any further steps in the liquidation until all of the Ricoh claims could be quantified. Ricoh's position was that no definitive valuation of the contingent claims could be made until the audit process was completed and that the liquidators should ring fence a sufficiently large reserve prior to any distribution to other creditors and members out of which the contingent claims under the indemnities, once crystallised, could be paid.
The liquidators' position, as set out in a letter of 20 th May 2009, was that it was unnecessary to wait until all of the tax liabilities became crystallised. They took the view that they were obliged to value any contingent claims under IR 4.86 and that the claims could be valued with, as they put it, a good degree of accuracy or, failing that, a realistic estimate made of the worst case outcome so as to enable an appropriate reserve to be set aside to meet the claims.
One of the difficulties has been the disparity between the amount which Ricoh has contended should be reserved to meet the contingent claims and the liquidators' own estimate of what might constitute the worst case scenario. In their letter of 8 th February 2010 Ricoh calculated that a reserve of €11,886,695 was necessary to meet potential tax exposures in Germany (€3,315,448), France (€5,160,047), Italy (€3,217,632) and Spain (€193,568). But by 15 th March 2010 the French tax authorities had concluded their investigations and it was agreed that the provision for French tax should be reduced to €27,990 and that this should be treated as a crystallised debt thereby reducing the proposed reserve to €6,734,638.
The liquidators' final position was to reject the request either to defer any distribution until all of the tax claims falling within the indemnities had crystallised or to make a reserve in the sums indicated in Ricoh's letters of 8 th February and 15 th March 2010. Instead they proceeded to determine and value the contingent claims under IR 4.82 and 4.86 and set out their conclusions and reasons in a letter dated 24 th March 2010. In essence, they considered that the proposed reserve was a worst-case assessment of liability; not a genuine estimate of value; and that a realistic valuation of the contingent liabilities was €268,961 made up as follows:
(1) Infotec Germany : nil;
(2) Infotec France : €27,990;
(3) Infotec Italy : €173,246;
(4) Infotec Spain : €67,725.
On 13 th April 2010 Ricoh issued an application seeking a direction under s.112 of the Insolvency Act 1986 that the liquidators should be required to make a retention of £11m which should not become available for distribution to members until either the contingent claims of Ricoh had crystallised or 31 st January 2014 whichever is the sooner. The latter date is the end of the 7 year indemnity period. The application also challenged the liquidators' valuation of the contingent claims in Ricoh's proof of debt.
In December 2010 directions were given for the exchange of factual and expert evidence but the application did not come on for hearing until March 2012. The parties' tax experts had by then agreed that, on the basis of a balance of probability test, there were likely to be no tax liabilities falling within the indemnity in respect of Infotec Germany and Infotec Spain; that the liability of Infotec France had effectively crystallised in the sum of €27,990; and that those of Infotec Italy would amount to €40,337 against the liquidators' figure of €173,246. On a worst-case basis the parties were agreed that the figures for Infotec Germany and Infotec Italy should be €117,370 and €1,834,377 respectively. The reduction in these figures for Infotec Germany and Infotec Spain as against Ricoh's estimates of liability at the date of the original application was due to the expiry of various limitation periods for the making of a tax assessment. It was therefore agreed that the trial could proceed without the need to call any expert or valuation evidence as to the amount of the alleged tax liabilities.
Since the date of the trial and judgment, the Italian tax authorities have decided not to appeal to the Italian Supreme Court against various tax decisions with the result that, on a worst-case scenario, the tax liabilities of Infotec Italy will not exceed €331,864. A further German limitation period expired at the end of 2012 thereby reducing the potential tax liability of Infotec Germany to nil.
Ricoh's primary case before the judge was that the liquidators were wrong to proceed to a final distribution without establishing a suitable reserve to meet Ricoh's contingent claims in full. At the date of the trial that would have involved setting aside some €1,979,746. The figure is now reduced to €331,864. It is said, in short, that Ricoh was given a full indemnity against these tax liabilities under the SPA and is now being offered what amounts to a dividend in a wholly solvent liquidation. The Company, acting by the liquidators, is therefore seeking to walk away from its contractual liabilities under the indemnity whilst at the same time retaining the consideration paid by Ricoh for the Infotec companies which was calculated on the basis that they would be free of the tax claims.
The judge was sympathetic to this argument but held that once a contingent creditor had proved in the liquidation for its debts and they had been valued, there was no room in the statutory scheme to allow the liquidators to delay a distribution to members pending the crystallisation of the contingent liabilities:
"40. In summary therefore the position is as follows — the members of a company are entitled to place their company in MVL. Once a company has been placed in MVL it is subject to the statutory process set out in the IA and the IRs. Once a creditor seeks to prove for a contingent liability with an uncertain value IRs r.4.86 applies. It is mandatory in its terms. It requires that a liquidator "…shall …" estimate the value of a debt not having a certain value where, as here, the creditor concerned has proved for the debt or liability in the liquidation. There is no mechanism by which there can be carved out of the statutory process some extra statutory scheme by which claims that a creditor considers too difficult to quantify but which have not been disclaimed should be provided for by retention for an indeterminate future period. Such a process would be riddled with uncertainty, would prolong liquidations, would increase the cost of liquidations and at least potentially could result in unfairness to some classes of creditor in...
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