Share purchase agreements often include indemnities or covenants to pay designed to protect the buyer for a period after completion where some unquantifiable liability is anticipated that will impact on the value of the company being acquired. This is particularly so in the case of unpaid tax.

On their own, these protections are only as good as the seller’s ability to pay, and commercial parties are generally well aware of the risks posed by the other side’s insolvency before the protection expires. Perhaps less thought has been given to the possibility that a financially healthy corporate seller will duck out of the protection period early by means of a (solvent) members’ voluntary liquidation (MVL). What if the amount due from the seller remains unascertained and the liquidator takes a different view from the buyer on the likely outcome? Can the seller’s shareholders walk away with the liquidation surplus, some of which might have been payable to the buyer if the protection period had run its course?

Yes, very possibly, according to the Court of Appeal in Ricoh Europe Holdings BV v Spratt and Another.

The facts

The buyer, Ricoh, bought Infotech (a group of companies) from Danka Business Systems plc in 2006. The terms of the acquisition agreement included full indemnities against Infotech’s tax liabilities in various European jurisdictions, enforceable for seven years after completion. But the seller entered into an MVL in 2009. Its joint liquidators in the usual way announced that they intended to make a single and final distribution to all creditors and asked creditors to submit any claims.

The buyer had a claim against the seller under the tax indemnity, contingent on the ongoing tax audit of Infotech being conducted by various European tax authorities. The buyer claimed that the total potential liability was over €11m. The liquidators, however, estimated the claim to be about €260,000.

The buyer argued that an MVL involved payment of all creditors in full and that that meant valuing its claim on a worst-case scenario. It applied unsuccessfully to the High Court for an order directing the liquidators to retain €11m pending finalisation of the tax audit, and then took the decision on appeal.

The decision

The Court of Appeal rejected the appeal. Contingent claims of creditors are satisfied through the valuation of their claims under the Insolvency Rules. Like any other contingent creditor, Ricoh had to prove in the winding-up in accordance with the statutory process and accept the liquidator’s valuation of the claim, based on the information then available. The liquidators had correctly operated the statutory machinery in conducting a fair and genuine estimate of the value of the claim.

In particular, the Court said that:

  • the insolvency regime does not require liquidators to guarantee a 100% return on an indemnity by assuming the worst-case scenario valuation. That would produce a result that was unfair to the other creditors and the members.
  • the fact that the contingent liability arises under an indemnity (which could be characterised as a kind of insurance against prospective loss) makes no difference: it is still simply a matter of the liquidators having to assess the risk that the triggering event will occur.
  • the valuation must be based on a genuine and fair assessment of the chances of the liability occurring. In Ricoh the liquidators had had to use their own expertise and that of their advisers to make a realistic estimate. They had not been required simply to wait and see: that would be the opposite of valuation. Anyway, under the Insolvency Rules the valuation remains open to variation in the light of subsequent events right up to the completion of the liquidation.
  • the regime does not allow a liquidator discretion to retain funds pending determination of contingent claims, although there can be cases where a contingent claim is so imminent that the liquidator may wait for the relevant events to occur, rather than incurring costs in estimating the liabilities. In Ricoh it would have been a matter of waiting more than a year, which was too long.
  • the effect of the Insolvency Rules is to allow the liquidator, after the disposal of any appeal against valuation, to distribute the assets of the company free from any further claims by creditors.


Buyers who have negotiated a post-completion period of protection are bound to feel short-changed if the seller takes advantage of the winding-up regime in this way. In theory, the buyer might get a bigger payment in the MVL than it would otherwise have done, and there is also the benefit of being paid earlier. But it is galling to see the seller’s shareholders getting money that might have gone to the buyer.

An MVL will not always be a practical possibility: the seller might, for example, have other businesses to run. It will often be clear enough to the buyer whether the selling company will cease to have a purpose after the sale. If there is any doubt, the buyer should consider how to minimise the risk. A prohibition on MVLs in the share purchase agreement might provide a route to injunctive relief, but it is always uncertain whether the court will exercise its discretion and grant an appropriate order. If the only remedy is in damages the buyer might simply end up with a contingent claim in the winding up.

If the buyer has agreed to pay deferred consideration it might be able to negotiate terms reducing its payment obligations if the seller does an MVL (although there can be legal complications stemming from the law on penalties, for example); or it might be possible to address the buyer’s concerns by agreeing a retention. A suitably-worded guarantee or indemnity from a substantive shareholder might also be a solution.