Neutral Citation Number: [2013] EWCA Civ 92
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

IN THE MATTER OF DANKA BUSINESS SYSTEMS plc (in members’ voluntary liquidation)
And in the matter of the insolvency act 1986
Royal Courts of Justice
Strand, London, WC2A 2LL

Date: 19th February 2013
Before :

LORD JUSTICE MUMMERY
LORD JUSTICE PATTEN
and
LORD JUSTICE TREACY
- - - - - - - - - - - - - - - - - - - - -
Between :

	(1) RICOH EUROPE HOLDINGS BV
(2) RICOH DEUTSCHLAND GMBH
(3) RICOH AUSTRIA GMBH
(4) RICOH ITALIA SRL
(5) INFOTEC HOLDINGS FRANCE SA
(1)	(6) RICOH ESPANA SLU	

Appellants/
Applicants
	
	- and -
		
	(1) JEREMY SPRATT
(2) JOHN DAVID MILSOM
(as joint liquidators of Danka Business Systems Plc)	

Respondents	

- - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - -

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
- - - - - - - - - - - - - - - - - - - - -
Judgment

Lord Justice Patten : 
1.	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 12th 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 31st 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.
2.	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.
3.	The resolution placing the Company into members’ voluntary liquidation was passed on 19th February 2009.  On 17th 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 28th April 2009.  Ricoh responded by letter dated 22nd 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. 
4.	The liquidators’ position, as set out in a letter of 20th 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. 
5.	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 8th 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 15th 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.
6.	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 8th February and 15th 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 24th 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.
7.	On 13th 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 31st 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.
8.	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.
9.	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.
10.	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. 
11.	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 insolvent liquidations. The statutory scheme has been designed to place a present value on uncertain future claims in order to enable the liquidation process to be brought to a speedy conclusion. The alternative is likely to have precisely the opposite effect. In my judgment therefore, once notice to prove has been given and where (as here) the creditors concerned have proved then the statutory scheme must be applied.
…
47. In those circumstances I am not able to agree that the liquidators were wrong to proceed with the liquidation by valuing on the contingent claims. Had they not done so they would have been vulnerable to criticism by the members that the liquidation was not being conducted in accordance with the statutory scheme. Once (a) the MVL process had been embarked upon by the Company's members, (b) notice of intention to make a distribution had been given and (c) Ricoh had proved in accordance with that notice, the only choice the liquidators had was either to apply for directions under IA s.112 or proceed to value the claims in accordance with IRs r. 4.86. Had an application been made to the Court in those circumstances, in my judgment the Court could only have either directed the liquidators to arrive at a valuation in accordance with IRs r.4.86 or undertaken such a valuation itself or, possibly, given directions to the liquidators as to how to arrive at an appropriate valuation. I question whether the Court would have been empowered to direct a solution for which no sanction is to be found in the statutory scheme. I prefer not to express a view as to whether the Court could or would have directed the liquidators to postpone either a distribution to creditors or a decision whether to admit Ricoh to proof in respect of its contingent claims had such an application been made prior to the submission of a proof by Ricoh or a valuation of the contingent claims being made by the liquidators because the issue does not arise.”
12.	The passage of time has, of course, diminished the gap between the parties in financial terms.  But an issue of principle remains as to whether the liquidators should be entitled to distribute the assets of the company to its creditors and members without making provision in the form of a retention for what is now the worst-case assessment of the relevant tax liabilities.  That argument can be put in a number of ways.  Ricoh challenges the existence of an obligation on the part of a liquidator in an MVL to proceed forthwith to value the contingent claims and to make a distribution to creditors and thereafter to members on the basis of that valuation.  But an issue has also been raised as to whether, once the contingent claims have been admitted to proof and valued, there remains a residual discretion to delay a final distribution until after the outcome of the contingency is known at least where that event will occur within a reasonable period of time. 
13.	In this case Ricoh threatened an application for an injunction to restrain the liquidators from proceeding to a valuation of the contingent claims under IR4.86 but no such application was in fact made as part of an application for directions under IA s.112 and s.168(5).  Any challenge in these proceedings to the liquidators’ decision to proceed to a valuation therefore faces the objection that to succeed Ricoh must demonstrate that the exercise of discretion which took place was flawed in the sense that it was one which no reasonable liquidator in the circumstances of this case could properly have made: see Re Edennote Ltd [1996] 2 BCLC 389 at p. 394.  If, on the other hand, the challenge is limited to the value at which the contingent claims should have been admitted to proof (worst case or probable amount) or whether (and, if so, how) the liquidators should now exercise any residual discretion to postpone a final distribution to members then the Court can decide the issue (as the judge did) on the merits without taking into account an exercise of the discretion already made and acted upon. 
14.	As appears from the passages in his judgment quoted above, the judge took the view that he was not seized of any issue as to whether the liquidators ought to have postponed a decision to admit Ricoh’s claims to proof or to make a final distribution.  The questions he dealt with were whether the contingent claims should have been admitted to proof in their full value and whether the liquidators should give effect to the indemnity by making a retention from any distribution of a sum sufficient to enable the tax claims to be paid in full on the basis of a worst-case scenario.  Mr Chivers QC does not suggest that the estimates of the claims made on that basis necessarily represent the true measure of liability.  Indeed, it is part of his case that they do not and that a principal reason for waiting for the outcome of the contingency is to ensure that his clients are neither underpaid nor overpaid.  But at the time of proof the worst case valuation provided one possible mechanism for ensuring that his clients received the complete indemnity they had contracted for. 
15.	The primary relief sought in Ricoh’s s.112 application is an order requiring the liquidators to retain or ring fence the sum of £11m from any distribution to members until the contingent claims have crystallised or 31st January 2014 whichever is the sooner.  If and to the extent that it is unsuccessful in obtaining this relief it applies under IR 4.83 to challenge the liquidators’ assessment of the value of the contingent claims contained in their letter of 24th March 2010: see paragraph 6 above. 
16.	The judge was therefore right to regard the application as limited to the correctness of the valuation and the power of the liquidators now to make a retention against distribution in the sum of at least €331,864.  Although Ricoh’s response to the liquidators’ IR 4.182A notice was to request them to defer a valuation of the contingent claims until the full extent of the claims could be quantified, there was no challenge to the liquidators’ decision to serve the notice nor, I think, could there have been.  The liquidators, on assuming their appointment, came under a statutory duty to proceed with the liquidation of what was evidently a solvent company.  The first step in that process was to ascertain the extent of the Company’s liabilities to creditors which is achieved through the medium of an IR 4.182A notice requiring the debts to be proved.  Although I do not suggest that liquidators lack any discretion to delay the valuation of contingent debts where the liability will imminently crystallise, the stop date for the purposes of the indemnities was some five years after the date of the liquidators’ appointment.  In any event Ricoh chose to engage with the valuation process by proving for their contingent claims and then negotiating with the liquidators on the valuation issue. 
17.	We are not therefore concerned with a direct challenge to the decision to admit the contingent claims to proof and to value them.  That is now water under the bridge and it is unnecessary to consider whether the decision to serve the IR 4.182A notice or to proceed with the valuation was Edennote/Wednesbury unreasonable or is susceptible of a merits-based challenge under s.112 on the principles described in Re Buckingham International Plc (In Liquidation) [1998] 2 BCLC 369.  Ricoh’s challenge must operate within the confines of the statutory process that has now commenced.  The first issue therefore is whether the judge was right to conclude that once the contingent claims had been admitted to proof the liquidators had no alternative but to proceed to value them and then to distribute the net assets to the members after satisfying the creditors in the amount of the valuations.  If, even post-valuation, the liquidators are able (and ought) to make a retention of the kind claimed then the correctness of the valuations is not an issue.  If, on the other hand, the judge is right and no such residual discretion exists then Ricoh can only guarantee the possibility of a full indemnity by successfully challenging the valuations. 
18.	It is convenient to start with the statutory provisions contained in the Insolvency Act 1986 (“IA 1986”) and the Insolvency Rules (“IR).  IA 1986 s.107 provides that:
“Subject to the provisions of this Act as to preferential payments, the company’s property in a voluntary winding up shall on the winding up be applied in satisfaction of the company’s liabilities pari passu and, subject to that application, shall (unless the articles otherwise provide) be distributed among the members according to their rights and interests in the company.”
19.	This is a general rule which applies to all types of voluntary liquidation but is concerned only with the distribution of the company’s property as between members and creditors.  It does not of itself specify the procedures to be followed as part of the liquidation for valuing the claims of creditors nor does it impose a timetable for the process of distribution.
20.	The detailed provisions governing the proof and valuation of debts in the winding-up are to be found in the IR:
“4.73(2) (2-CVL) In a voluntary winding up (whether members' or creditors') the liquidator may require a person claiming to be a creditor of the company and wishing to recover his debt in whole or in part, to submit the claim in writing to him. 
(3) A creditor who claims (whether or not in writing) is referred to as “proving” for his debt; and a document by which he seeks to establish his claim is his “proof”. 
….
4.82.—(1) A proof may be admitted for dividend either for the whole amount claimed by the creditor, or for part of that amount. 
(2) If the liquidator rejects a proof in whole or in part, he shall prepare a written statement of his reasons for doing so, and send it forthwith to the creditor. 
4.83.—(1) If a creditor is dissatisfied with the liquidator's decision with respect to his proof (including any decision on the question of preference), he may apply to the court for the decision to be reversed or varied. 
The application must be made within 21 days of his receiving the statement sent under Rule 4.82(2). 
(2) A contributory or any other creditor may, if dissatisfied with the liquidator's decision admitting or rejecting the whole or any part of a proof, make such an application within 21 days of becoming aware of the liquidator's decision. 
(3) Where application is made to the court under this Rule, the court shall fix a venue for the application to be heard, notice of which shall be sent by the applicant to the creditor who lodged the proof in question (if it is not himself) and to the liquidator. 
(4) The liquidator shall, on receipt of the notice, file in court the relevant proof, together (if appropriate) with a copy of the statement sent under Rule 4.82(2). 
(5) After the application has been heard and determined, the proof shall, unless it has been wholly disallowed, be returned by the court to the liquidator. 
(6) The official receiver is not personally liable for costs incurred by any person in respect of an application under this Rule; and the liquidator (if other than the official receiver) is not so liable unless the court makes an order to that effect. 
….
4.84.  A creditor's proof may at any time, by agreement between himself and the liquidator, be withdrawn or varied as to the amount claimed. 
….
4.86.—(1) The liquidator shall estimate the value of any debt which, by reason of its being subject to any contingency or for any other reason, does not bear a certain value; and he may revise any estimate previously made, if he thinks fit by reference to any change of circumstances or to information becoming available to him. 
He shall inform the creditor as to his estimate and any revision of it. 
(2) Where the value of a debt is estimated under this Rule, or by the court under section 168(3) or (5), the amount provable in the winding up in the case of that debt is that of the estimate for the time being.” 
21.	In the case of a contingent liability the estimate or valuation of the claim only becomes of critical importance when the liquidator comes to make a distribution to the members.  At that point in time the possibility of agreeing a variation of the amount claimed under IR 4.84 or of revising the estimate of value under IR 4.86 ceases to be of any practical utility to the contingent creditor if the liquidator proceeds to distribute any surplus over the existing valuation.  If, therefore, the liquidators in this case have a discretion to postpone a final (as opposed to an interim) distribution post-valuation until the indemnities have expired in 2014 now is the time when they must consider whether to exercise it. 
22.	IR 4.182A provides that:
“(1) In a members' voluntary winding up the liquidator may give notice of the intention to make a distribution to creditors. Such notice—
(a) shall be gazetted; and
(b) may be advertised in such other manner as the liquidator thinks fit.
(2) In addition to the standard contents, the notice under paragraph (1) must—
(a) state that the liquidator intends to make a distribution to creditors; and
(b) specify a date (“the last date for proving”) up to which proofs may be lodged at a specified place, which must be the same date for all creditors and not less than 21 days from that of the notice.
(3) The liquidator is not obliged to deal with proofs lodged after the last date for proving; but he may do so, if he thinks fit.
(4) A creditor who has not proved his debt before the last date for proving or after that date increases the claim in his proof is not entitled to disturb, by reason that he has not participated in it, either at all or, as the case may be, to the extent that his increased claim would allow, that distribution or any other distribution made before his debt was proved or his claim increased; but when he has proved his debt or, as the case may be, increased his claim, he is entitled to be paid, out of any money for the time being available for the payment of any further distribution, any distribution or distributions which he has failed to receive.
(5) Where the distribution proposed to be made is to be the only or the final distribution in that winding up, the liquidator may, subject to paragraph (6), make that distribution without regard to the claim of any person in respect of a debt not already proved.
(6) Where the distribution proposed to be made is one specified in paragraph (5), the notice given under paragraph (1) shall state the effect of paragraph (5).”
23.	The notice of 17th March 2009 (see paragraph 3 above) was given under IR 4.182A(5).  It was intended to be a final distribution which would therefore be dependent upon the debts already proved.  But, as Mr Chivers stressed, IR 4.182A is concerned with a distribution to creditors; not to members.  In a solvent liquidation the distribution to creditors is not, he submits, fatal to the interests of contingent creditors because there will always be a surplus of assets over liabilities out of which their claims can be met.  The distribution of assets to members is, for the reasons already given, obviously different.  But there is nothing in IR 4.182A which in terms excludes the exercise of a residual discretion to distribute to members on the basis of a retention against contingent claims. 
24.	The ultimate provision is, of course, IA s.107.  The rights of the members to the surplus assets only arise once the company’s liabilities to its creditors are satisfied.  As Mr Chivers put it, members come last.  The judge’s approach was that this balance was struck through the medium of IR 4.182A and 4.86.  Although a creditor is not obliged to prove and thereby subject his claim to a valuation by the liquidator, he runs the risk if he does not prove that the liquidator may call his bluff by giving notice under IR 4.182A and proceed to make a distribution to creditors without regard to his claim.  Mr Chivers submits that if the stand-off persists and the liquidator does then proceed to a distribution to members without a reserve, the creditor will be able to prevent this by applying to the court under s.112. 
25.	The principal function of IR 4.182A is to enable the liquidator to make distributions to creditors free from any challenge based on late claims.  This is likely to be of critical importance in an insolvent liquidation where additional claims will affect the available dividend.  As mentioned earlier, the rule does not impose an obligation on the creditor to prove for his debt (and so subject his claim to a valuation under IR 4.86) but a failure to prove in accordance with the notice will shut the late claim out from participating in the distribution to creditors.  
26.	IR 4.182A was formulated in the light of the decision of Sir Robert Megarry V-C in Re R-R Realisations Ltd [1980] 1 WLR 805.  The liquidators (in a creditor’s voluntary liquidation) had announced that they intended to make a final distribution to ordinary stockholders when they were served with proceedings claiming damages arising out of the crash of an aircraft powered by Rolls-Royce engines.  All the company’s known debts had already been paid.  On the liquidators’ application for leave to distribute without providing for the new contingent claims the order was refused on the ground that it would not be just to shut out the late claims.  At p. 811 Sir Robert Megarry V-C said:
“There is another point which I think must be carefully borne in mind in considering the cases on administration of estates, and that is the standing of the claimant in relation to those to whom the distribution is to be made. If the claimant is a creditor, it may well be right to be slower to shut him out if the distribution is to be made to beneficiaries than it is if the distribution is to be made to other creditors. Correspondingly, in the voluntary liquidation of a company, it may well be right to give the claimant greater latitude if the distribution is to be to members rather than to other creditors. Just as a man should seek to be just before he affects to be generous, so I think that an especial care is needed to ensure that all creditors are paid before distributions are made to the members. It is only subject to the satisfaction of the company's liabilities that the company's property is distributable among the members: see the Companies Act 1948, s 302. I do not, of course, say that a creditor has an absolute right to come in at any time, however gross his delay, whatever his conduct, and however unjust this would be to others. But I do say that the court should be slower to shut out a creditor as against members than as against other creditors.
…
With that in mind, I turn to the only two cases cited to me which deal with voluntary liquidations. Re House Property and Investment Co Ltd was very different. In it, Roxburgh J rejected a claim by a lessor to have enough of the assets of the company (which was an original lessee) set aside to meet all future liabilities for the payment of rent and the due performance of the covenants in the lease. Instead, it was held that the lessor should prove in the liquidation for the difference in value of the lease with the benefit of the original lessee's covenants and its value without that benefit. That, of course, is very far away from the present case; but in his judgment Roxburgh J ([1953] 2 All ER 1525 at 1545, [1954] Ch 576 at 612) referred to the implied obligation imposed by the Companies Act 1948 on liquidators to complete the liquidation and effect a final distribution of the assets within a reasonable time. I fully accept this; but I do not think that there flows from this duty any corresponding duty on creditors to make their claims with all reasonable diligence. Obviously both prudence and convenience require them to do so; but that is not the same saying that there is a legal obligation to do so. I think that the courts must be cautious in laying down any rules which would in effect shorten the periods available to a claimant under the Statutes of Limitation. In the case of a company in voluntary liquidation where a final distribution is in contemplation, the practical effect would be to substitute an undefined period of diligence for whatever was the appropriate statutory period of years. A doctrine of laches may be appropriate enough in claims made in equity in the administration of estates, but I do not think that it should be admitted without compelling reasons in claims at law made in the statutory process of voluntary liquidation; and I can see no compelling reasons.”
27.	Under IR 4.182A(5) the sanction for a late claim in the case of a final distribution to creditors is the exclusion of the late claim from the only or final distribution to be made.  Mr Chivers submits that even these provisions are ineffective to exclude the right of a creditor to have his claim considered and dealt with in priority to any distribution to members.  But we are not concerned with late claims in this case or with the issue of whether they can be admitted to proof out of time.  Ricoh has proved for its contingent claims in response to the IR 4.182A notice and has had them valued.  The only issue is whether it can insist upon a retention to ensure that once crystallised they are paid in full.
28.	The decision in Re R-R Realisations Ltd does not in my view assist on this point.  It was concerned with whether the late claims should be admitted to proof and in due course valued and paid prior to the proposed distribution to stockholders.  Issues as to how the claim should be valued or whether there should be a distribution subject to a reserve simply did not arise.  The same can be said of Tombs v Moulinex SA [2004] EWHC 454 where the court had to decide whether a surplus in the hands of a liquidator in an MVL should be paid to the administrators of the parent company or retained in the hands of the liquidator to meet future product liability claims, some of which might exceed the limit of the company’s insurance cover.
29.	We are concerned in this case with how the liquidators should process existing, known contingent claims which have been admitted to proof and which have been valued by the liquidator.  The existence of a right to challenge the valuation under IA s.112 (incorporating IA s.168(5)) might be thought to be a strong factor against the existence of a further overriding discretion to make a retention to await the contingency rather than proceeding to distribute any surplus on the basis of the valuation.  And Mr Arden QC, on behalf of the liquidators, contends in short that the obligation on the liquidators to value contingent claims under IR 4.86 is mandatory (“shall”) and all-embracing (“any debt”) and that there is no residual discretion in effect to wait and see outside the statutory scheme.  The valuation of the contingent claims can be revised to take account of new information or a change of circumstances.  But the liquidators cannot simply decline to make any valuation at all or, once made, refuse to give effect to it in the liquidation of the company.
30.	A case which is much closer to the present one is the decision of Roxburgh J in Re House Property and Investment Co Ltd [1954] 1 Ch 576.  The landlord of some commercial premises applied to the court for an order that the liquidator of the tenant company (which was in voluntary liquidation) should be required to set aside a reserve fund to meet all future liabilities for rent and for the performance of the tenant’s covenants.  The order was refused on the basis that the proper course was for the landlord to lodge a proof in the winding-up for the difference between the value of the lease (which had been assigned) with and without the benefit of the covenants of the original tenant. 
31.	At p. 612 Roxburgh J said:
“It is the right of a company to wind itself up even though it is not insolvent. It is a statutory right: [see s 278(1) of the Act of 1948]. It is part of the policy of the law of England, and it is one manifestation of that wide branch of the law which abhors perpetuity. That, to me, is a feature of the greatest importance. Of course, a liquidator is not to distribute the property among the members before he has dealt with the liabilities. That is plain enough. But I am certain that, though it does not say so in express terms, the policy of the Act, as expressed in s 302, carries the implication that he has to deal with the liabilities finally within a reasonable time, and thereafter to distribute amongst the members within a reasonable time. I imply those words in s 302 from the general policy of the Act. Parliament cannot have contemplated liquidations lasting for 999 years. Where is the line to be drawn? Of course, what is reasonable must vary according to the circumstances of the company. In some cases the time required to complete the winding-up may be very long and still be reasonable, but, in my view, the policy of the Act would abhor an arrangement under which a winding-up could not be completed for seventy years because the liquidator had to administer, for the benefit of a landlord, a fund created out of the assets of the company, which was the original lessee, when the lease had been assigned for value and was beneficial to the assignee, and the landlord, presumably, would be delighted to accept a surrender at any moment and the chance of any claim against the original lessee ever becoming a live claim for actual money was almost as remote as it could be.”
32.	Mr Chivers submitted that the decision turned very much on its particular facts and that there are also passages in the judgment which contemplate that the setting aside of a fund might in exceptional cases be appropriate and within the powers of the liquidator.  But it is clear from the judgment in Re R-R Realisations Ltd quoted earlier that the case has been treated as authority for the proposition that a liquidator is under an obligation to complete the liquidation even though the effect of the winding-up may be to defeat the contingent claims of its creditors.  It follows from this that the liquidator is not obliged to set aside a fund to meet those contingent claims in full and that the claims of the contingent creditors fall to be satisfied through the valuation of their claims under what is now IR 4.86.  The matter is put most clearly in a passage in the judgment of Hoffmann LJ in Re Forte’s (Manufacturing) Ltd [1994] BCC 84 at p. 89:
“A company is certainly entitled to initiate and complete the process of winding up notwithstanding that it will thereby become unable to fulfil future or contingent obligations. Contingent creditors become entitled to prove for the value of their claims at the date of winding up, but the company cannot be required to set aside a fund against the possibility that the contingency may happen. The liquidator is entitled to distribute the assets in accordance with the rules and such distributions cannot afterwards be disturbed. Re House Property and Investment Co Ltd, in which a landlord tried unsuccessfully to require the liquidator of its original tenant company to set aside a fund to pay the rent if the assignee should default, illustrates all these principles very well. 
On the other hand, it is also a rule of winding up that a creditor may submit a proof or amend an existing proof at any time during the liquidation. The rule that prior distributions cannot be disturbed means that it may not do him much good, but in principle he is entitled to make his claim. Another principle of liquidation is that contingent claims are valued in the light of subsequent events, so that a proof may be increased because the contingency has happened: see Macfarlane's Claim (1880) 17 ChD 337 . Furthermore, it is possible that a creditor may be entitled to prove for an accrued debt when the contingency has occurred after the winding up. I express no opinion on this point, but whatever the form of the proof, there is no principle which excludes new or increased claims.”
33.	We were also referred to the decision of Lewison J in Re British Aviation Insurance Co Ltd [2005] EWHC 1621 where a fully solvent insurance company in run-off sought approval of a scheme of arrangement under s.425 of the Companies Act 1985 under which a cut-off would be imposed on the contingent claims by subjecting them to a process of “estimation” under which they would be valued and paid out.  For the purpose of convening the meeting to vote on the scheme the creditors had been treated as a single class and the scheme was approved by a majority both in number and value.  But a group of policyholders who held cover for potentially large IBNR (incurred but not reported) claims for asbestos exposure and other industrial liabilities opposed the sanctioning of the scheme on the basis that they should have been treated as a separate class in the meeting.  Under a continuing solvent run-off they would have had their claims paid in full as and when they occurred.  Instead of an indemnity they were now to receive an estimated pay-off.
34.	In accepting that policyholders with IBNR claims were in a different class Lewison J said:
“[83] Under the scheme, a policyholder with an accrued claim will have that claim paid in full. If the scheme is not approved, he will still have his claim paid in full. The measure of the claim will be the amount for which he is entitled to indemnity under the policy in respect of the known claim. By contrast, the position of a policyholder with an IBNR claim is different. Under the scheme he will be entitled to have his contingent claim valued. He will then be entitled to be paid the full amount of the valuation (less a discount for the time cost of money). Although a valuation of a future (and contingent claim) can be made, and may even be described as a fair valuation, it is only a valuation. It is not an indemnity. Indeed, whatever else one may be able to say about a valuation of a future contingent claim the one thing that one can say with near certainty is that, barring a miracle, the valuation will not be the same amount as the indemnity. If, on the other hand, the scheme is not approved, the Company will remain in run-off. It will pay claims as and when they arise; and the measure of the payment will be the full indemnity to which the policyholder is entitled. It may be that anticipated claims by some policyholders will never arise; in which case the Company will not have to pay. But that is what insurance is about. The policyholder bargains for the insurer to bear the risk of a contingency materialising. The insurer is in the risk business; and the policyholder is not. Unlike the policyholder with an accrued claim, who knows the extent of his exposure to that claim, the policyholder with an IBNR claim does not. The essence of the scheme is that it retransfers the risk from the insurer (who had contracted to bear it) to the policyholder (who did not). Thus the rights of a policyholder with an IBNR claim are fundamentally different under the scheme from the rights that he would have in the absence of the scheme.”
35.	Mr Chivers cites this in support of Ricoh’s claim for a retention to be made as demonstrating the inherent unfairness in the valuation process.  But it is important to note that the issue of fairness under the scheme was being considered by the judge in the context of a comparison with what the position of the policyholders would be if the company was to remain in solvent run-off.  A solvent voluntary liquidation was expressly rejected as the relevant comparator and nothing which the judge said really assists on the first question which we have to decide.  I accept (as the judge did) that the ability of a solvent company to terminate its contractual liabilities by a process of voluntary liquidation can result in unfairness to claimants such as Ricoh who have the benefit of indemnities against liabilities which are not readily quantifiable.  But the issue of fairness is not at large in these proceedings.  The question is how such claims are to be addressed through the statutory machinery of liquidation. 
36.	It is clear from the wording of IR 4.86 itself that there must be a valuation of contingent claims in order for them to be admitted to proof.  IR 4.86 is drafted on the assumption that “any” contingent claim is capable of valuation.  This is to be contrasted with the previous statutory regime contained in the Bankruptcy Acts under which:
“An estimate shall be made … of the value of any debt or liability provable as aforesaid, which by reason of its being subject to any contingency or contingencies, or for any other reason, does not bear a certain value.
Any person aggrieved by any estimate made by the trustee as aforesaid may appeal to the Court, and the Court may, if it think the value of the debt or liability incapable of being fairly estimated, make an order to that effect, and upon such order being made such debt or liability shall, for the purposes of this Act, be deemed to be a debt not provable in bankruptcy; but if the Court think that the value of the debt or liability is capable of being fairly estimated, it may direct such value to be assessed, with the consent of all the parties interested, before the Court itself, without the intervention of a jury, or, if such parties do not consent, by a jury, either before the Court itself or some other competent Court, and may give all necessary directions for such purpose, and the amount of such value when assessed shall be provable as a debt under the bankruptcy.”
	See Bankruptcy Act 1869 s.31 re-enacted in s.37(7) of the Bankruptcy Act 1883 and s.30(7) of the Bankruptcy Act 1914.
37.	There may be cases where the contingency is so imminent that the liquidator can sensibly wait for the event to occur rather than expending time (and possibly money) in a valuation of the chances of the claim ultimately materialising.  Even where such a degree of imminency does not exist, the valuation of contingent claims remains open to variation in the light of subsequent events under IR 4.84 right up to the completion of the liquidation in accordance with IA s.107.  But there are, I think, real difficulties in seeing how a liquidator who has already valued the contingent claims and so admitted them to proof in the amount of the valuation comes under a legal duty to provide for the contingency in full by making a reserve against any distribution to members.  The reference to the company’s liabilities in IA s.107 must be to the liabilities as determined in accordance with the IR.  Otherwise they serve no useful purpose.
38.	The effect of the IR 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.  Mr Arden was, I think, minded to accept that the liquidator could properly stay his hand if (post-valuation but pre-distribution) the contingency was about to occur.  I am by no means certain about that, although if the contingency does occur pre-distribution to members and so creates an actual liability of the company which the liquidator has not provided for then it would obviously be open to the creditor (absent agreement) to lodge an additional proof out of time which in a solvent liquidation the liquidator would have to deal with.  But where (as in this case) the contingency remains a year away I cannot see the basis on which the liquidator comes under a legal duty to make the retention sought in the s.112 application.  And absent such a legal duty, that part of the application must fail.  The liquidator is entitled to proceed to a distribution to members on the basis of the debts admitted to proof.
39.	I can now turn to the issue of valuation.  As explained earlier, the dispute now centres on the tax liabilities of Infotec Italy which the liquidators valued at trial in the sum of €173,246.  Ricoh’s worse-case assessment is €331,864.  In their letter of 24th March 2010 the liquidators set out the terms of the SPA and consider various defences which might be available to the Company as a result of Ricoh’s alleged failure to include various items in the completion accounts which are used to calculate whether the ranking claims (which must each exceed $35,000) amount in aggregate to a sum in excess of $2.15m which is 1% of the final purchase price under the SPA.  If the claims do not exceed this figure then nothing is payable. The liquidators estimated that the Company had a 50% chance of establishing that Ricoh’s claim would be excluded on this basis but we are not concerned on this appeal with issues of that kind.  Ricoh’s challenge to the liquidators’ valuation is limited to their assessment of the scale of the likely tax liabilities in respect of each of the Infotec companies.  Mr Chivers contends that the liquidators based these assessments on what they considered was the most likely outcome and, in doing so, failed to have regard to the nature of the indemnity which was to insure Ricoh against any relevant tax liabilities.  The claims should therefore have been valued at the full amount of the contingency.  The liquidators are entitled to delay any final distribution to creditors so that if this in due course proves to be too generous a valuation the surplus can then be distributed to members.
40.	At the hearing before the judge the experts reached the agreement on the tax liabilities referred to earlier in paragraph 8 of this judgment.  The judge was not therefore referred to the expert evidence and does not really deal with the question of valuation at all.  One can only assume that he considered that the most likely outcome approach adopted by the liquidators was correct or, at least, permissible.
41.	The appeal on valuation does not, I think, require us to analyse the liquidators’ approach in any more detail than I have summarised it.  The grounds of appeal and Mr Chivers’ skeleton argument concentrate on whether the liquidators should have based their valuation of the claims on the worse-case basis which would be used if one were calculating the amount of a reserve to set aside in order to meet the potential contingency in full.  As it is common ground that the liquidators did not perform their task under IR 4.86 on this basis then the appeal on valuation will have to be allowed and the matter remitted to them for re-valuation if Ricoh’s submissions on the basis of valuation are correct.
42.	Mr Chivers does not, of course, suggest that contingent claims of this nature cannot be valued in the way that the liquidators dealt with them.  His position is simply that this process does not produce a fair and accurate estimate of the outcome of the claim because it ignores the nature of the Company’s liabilities under the indemnities.
43.	It seems to me that any valuation of a contingent liability must be based on a genuine and fair assessment of the chances of the liability occurring.  The very concept of valuing a contingency implies the need to make an assessment of how likely are the chances of the event occurring.  The liquidator must therefore use his own expertise and that of any relevant advisors to make a realistic estimate of the likelihood of the Infotec companies sustaining the tax liabilities.  Where some material change in the relevant factual position occurs it must be taken into account.  But the liquidator is not, in my opinion, required simply to wait and see.  That is the opposite of valuation.  In the case of indemnity, it is true of course that the contractual liability of the party offering the indemnity operates as a kind of insurance against the prospective loss.  But in the hands of a liquidator who must make a current assessment of the risk of that event occurring, the nature of the indemnity is irrelevant to the assessment of that outcome.  There is nothing in IR 4.86 which requires the liquidator to guarantee a 100% return on the indemnity by assuming a worst-case scenario in favour of the creditors.  To do so would produce a valuation which, by definition, was unfair to the company and its other creditors and members.  The valuation provisions must apply in the same form to both solvent and insolvent liquidations.  I cannot see particularly in the case of an insolvent liquidation how such a valuation could ever be regarded as appropriate.
44.	For these reasons, I am not persuaded that there was an error by the liquidators in their approach to the valuation of these claims.  Some additional points are taken about the accuracy of certain aspects of the valuation given the range of possible outcomes but, in respect of the remaining Italian claim, I am not persuaded that they disclose any error of principle.
Conclusion
45.	Despite Mr Chivers’ attractive submission, I would therefore dismiss the appeal.
Lord Justice Treacy :
46.	I agree.
Lord Justice Mummery :
47.	I also agree.