What is meant by a contingent liability?
A contingent liability is a liability which the business may incur depending on the outcome of a future event which remains uncertain. An example would be an ongoing Court case, the result of which may or may not be a finding against the company, leading to a fine or other settlement charge.
Why is it important to understand if you have any contingent liabilities in the context of a transaction?
A potential buyer will need to understand the financial obligations which may arise if they acquire your company. You will need to make them aware of any contingent liabilities such as those which could arise from disputes or legal proceedings, the requirement to make repairs or refurbishment to any rented property at the end of the lease period or warranty claims arising from defective goods.