A contingent debt is a debt that is dependent on a future occurrence and is provable in insolvency proceedings. Examples of contingent claims follow.
It was formerly the law that an original tenant remains liable to the landlord for the whole term of the lease notwithstanding an assignment. If the insolvent was the original tenant under a lease, which was granted before 1 January 1996, there may be a contingent liability to the landlord, which will be provable in the insolvency. This would arise if the assignee defaulted on the terms of the lease. In such cases the insolvent may have the benefit of an indemnity from his/her assignee and the official receiver should consider the indemnity position before admitting a proof of debt from the landlord.
In leases granted after 1 January 1996, a tenant who assigns the whole or part of the premises demised to him/her is released from the tenant’s covenants of the tenancy, in relation to the part assigned, as from the date of the assignment [note 1]. Other tenancies continue to be governed by the previous law.
Unliquidated damages are not for a fixed amount and are awarded by a court as a matter of discretion. An action in tort, brought by a person who has suffered harm as a result of the action of the insolvent, may give rise to award of unliquidated damages. A petitioner has standing as a contingent or prospective creditor where he/she has an indisputable claim for substantial unliquidated damages [note 2] [note 3].
An employer who dismisses employees as redundant, is required to consult representatives of an independent trade union recognised by him/her prior to the dismissal (see paragraph 76.36) [Note 4]. Where an employer has failed to comply with this requirement a complaint may be made to an industrial tribunal by the trade union representative. If the tribunal finds that the complaint is well founded it shall make a declaration to that effect and may also make a protective award [Note 5]. A protective award orders an employer to pay remuneration to employees for a protected period up to a maximum of 90 days depending upon the number of employees dismissed and the consultation period properly required. Where an employer fails to make payments to employees under the protective award a complaint may be made by the employee to the industrial tribunal, which may order the employer to pay the complainant the amount due [Note 6]. Any sums due to an employee under a protective award should be treated as arrears of pay and may be, either wholly or in part, preferential claims (see paragraphs 40.89 to 40.95) [Note 7].
A protective award is a liability to which a company may become subject after it enters into liquidation by reason of an obligation to consult incurred before that date. A protective award is in these circumstances a contingent liability and thus provable within the liquidation [Note 8].
A guarantee can give rise to contingent claims against the insolvent. In the case of a manufacturing company, for example, the customers will have contingent claims in respect of any failure of the product during the normal warranty period, (see paragraph 40.108).
A personal guarantee may be a contingent liability but the rule against double proof means that the creditor cannot prove his/her claim until the amount guaranteed is paid in full by which time the amount of the debt will be known.
A performance bond (similar to a limited guarantee) granted by a bank for its customer's obligations is a contingent debt.
An insurance company by the nature of its business has numerous contingent liabilities. Special rules apply to the winding up of insurance companies; see Chapter 59, Unusual businesses and related assets (paragraphs 59.51 to 59.55).
Contingent liabilities must be valued. A trustee or liquidator cannot withhold out of the assets of the insolvent a large sum of money, and keep it invested, or in suspense, to answer any such claims, if they arise. A present value must be put on these future claims, and that will be the amount provable [note 9].
There is no statutory guidance as to the basis on which the contingent liabilities should be valued. The responsibility for estimating the value of the claim in the first instance is placed on the chairman of the meeting of creditors for voting purposes, and the liquidator or trustee for dividend purposes [note 10]. It may save protracted correspondence if the official receiver, as chairman of the meeting, liquidator or trustee, asks the creditor to provide his/her own calculation of the claim.
The official receiver as liquidator must advise the creditor of his/her estimate of the value of the claim [note 11]. The estimate may be revised in the light of further information or changed circumstances . If the creditor is dissatisfied with the liquidator’s or trustee's estimate or revision of estimate, he/she may apply for it to be determined by the court [note 12].
The best estimate possible of the amount of contingent claims should be incorporated into any statement of affairs prepared in the proceedings, see Chapter 12 - Statement of Affairs.