With a conventional share purchase agreement and tax covenant, the Covenantors to the tax deed will be obliged to make payments of £2,800 and £6,500 if the tax deed of covenant has been properly drafted and also assuming that there is no de minimis clause.
However, the Buyer will need to demonstrate that he has suffered a loss and will need to bring a claim under the warranties proving that loss before he receives refunds from the sellers in respect of the third bullet point above. If the Sellers can demonstrate that the Company has flourished in the period after Completion and that the value received by the Buyer, as reduced by the liabilities of £130,000, was at least equivalent to the total consideration paid, then there may be no recovery of the losses relating to the forklift accident.
A tax covenant is a covenant, or promise, to make payment in certain stated circumstances; it is therefore a document of some considerable power.
The simple essence of a tax covenant is that the buyer wishes to be protected from unexpected tax liabilities. The conversion of this simple goal into a workable legal document involves a number of twists and turns, as we will demonstrate in this guide. There appears to be a deep mystery as to why buyers are still expected to have far greater protection in respect of unforeseen tax liabilities than in respect of other unexpected outgoings. Tax deeds originated with Estate Duty and claims that could be made on a company in respect of external Estate Duty liabilities in certain circumstances. In such a situation the Company suffered a loss: a tax deed of indemnity therefore resulted in the Company being indemnified against that loss. This has then led to the definition of Tax being broadened over time, so that all taxes, with the possible exception of business rates, are now normally covered. One argument put forward for this is that unexpected tax liabilities are far more common than other unexpected liabilities. There is also a growing number of circumstances in which tax authorities can impose a secondary tax liability on a company if there is a failure to pay in another group company. However, at the end of the day, the treatment of tax liabilities on something akin to an indemnity basis appears to be nothing more than a matter of custom and practice. It is also nothing more than custom and practice that the documents are prepared in the form of a deed: as the parties are now commonly the Buyer and the Sellers, or some of the Sellers, there is consideration and it is difficult to see the requirement for the document to be prepared as a deed. Happily practice is rapidly changing in this area. It is also a feature of tax covenants, as with so much other legal drafting, that the length of the document seems to increase inexorably as additional clauses are introduced into standard precedents. Very often the risks being covered are very poorly understood by the professionals involved: they will sometimes parry and thrust with an impressive vigour over points which are of very little real risk in the transaction being considered. It is probably an unavoidable result of modern drafting that a new clause, once seen, is seized upon and included in the precedent document. Once elevated to this status, it is a courageous professional acting for the buyer who does not insist on the protection possibly available from the inclusion of the additional clause. It is with such sets of circumstances that the standard precedents in use grow in size each year.
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