CHAPTER FOURTEEN
RECOVERIES FROM THIRD PARTIES
7.1 If the Buyer or the Company is or may be entitled to a Recovery, the Buyer shall, or shall procure that the Company shall:
Executive Summary
A A central tenet of the classic tax covenant is that recoveries, (and corresponding savings, understatements and overprovisions) can act as credits which enable any sums paid or payable under the covenant to be reduced. They do not represent credits which effectively increase the net proceeds received by the Sellers. B The tax covenant operates so that the Covenantors have an immediate obligation to pay the Buyer. The Buyer then repays any Recoveries as they arise. The close relationship of the tax covenant to cash flows is maintained. C Recoveries should cover not only matters in respect of which a payment falls due under the tax covenant, but also any matters arising prior to Completion. Clearly a Recovery for the Covenantors is not appropriate if the Recovery has been recognised in the completion balance sheet as it is then an Accounts Relief, which is a form of Buyer’s Relief.
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