Corporate simplification – dealing with contingent liabilities

This article is kindly contributed by Ben Woodthorpe of ReSolve, the restructuring and recovery practice. Ben’s contact details are at the end of the article.

Removing dormant companies from a group may sound simple, but such tasks often pose difficulties. One such difficulty is how to deal with contingent liabilities when undergoing a programme of corporate simplification.

The scenario

You are tasked with removing an entity acquired a number of years previously which now lays dormant, its oil processing business having been transferred intra-group. The company is left with an intra-group receivable of a few million pounds and title to a plot of unused industrial land.

Recent correspondence received from the Environment Agency (EA), your rigorous due diligence and interviews with former staff have confirmed the existence of a potential contingent liability. The company is faced with a potential claim for land contamination, which may have a significant impact on group reserves. You and your fellow directors, however, are satisfied the claim will not exceed the amount of the receivable held.

The possible ways forward

Your options are limited. Realistically there are two ways to deal with it:

  1. The company proceeds to challenge the EA by appointing a legal team to fight the claim. This option may end up very costly for the company and the group and could last several years, with little difference made to the quantum payable. In the meantime, the group continues to incur the costs of ongoing accounting and compliance, which it was keen to eliminate.
  2. The directors make a statutory declaration the company will be able to pay its liabilities plus interest within 12 months of making the declaration. The corporate member resolves to voluntarily wind up the company and appoint liquidators to deal with the matter. Careful examination of the records would be required by the liquidators who would be able to utilise the powers vested in them by the insolvency legislation.

On balance and following advice, the directors choose option two.

The disclaimer

Having examined all company records, the liquidators are able to employ section 178 of the Insolvency Act 1986, which gives the liquidators the power to disclaim onerous property and determine the liability of the company in respect to the contaminated land, irrespective of the contingent nature of any claim. The appropriate notice is served and the EA is entitled to prove as a creditor in the liquidation for the loss it has suffered.

Proving a claim

The liquidators’ next step is to write to creditors inviting claims, giving 21 days from the date of issue of a notice of intention to declare a dividend to prove their debts. Late claims may be disregarded by the liquidators. Assuming a claim is received from the EA, the liquidators would need to adjudicate on the claim to prescribe it a value and report that value to the EA. Adjudication is a specialist area and is likely to require an expert, independent valuation from an agent instructed by the liquidators.

The admitted claim may be significantly less than the EA expected. The process described above is laid out in statute and is aimed at expediting the distribution of funds to creditors and members. Of course, agreeing a smaller claim enables a greater return to the company’s members. The process is also much quicker than settling claims outside of liquidation.

A creditor may seek to challenge the decision of the liquidators at Court and this may lead to a revision of the valuation, however there would need to be very good grounds for the court to agree a revision.

Other examples of contingent liabilities

The above is one example of a contingent liability where a disclaimer may be effective. Other examples may include:

  • Claims for rectification/remediation of a polluted water table
  • An onerous legacy lease on a redundant property or large piece of machinery

Common contingent liabilities that may not require the use of a disclaimer by a liquidator, but may be best dealt with by a liquidator inviting claims, prescribing value and crystallising amounts payable in liquidation, include:

  • Claims made under warranties or indemnities by purchasers of a business
  • An un-liquidated third party insurance claim made against a company

Ben Woodthorpe, the author, can be contacted on +44 (0) 207 702 9775, email or ben.woodthorpe@resolvegroupuk.com.
www.resolvegroupuk.com

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