In Butters and ors v BBC Worldwide Ltd and ors, decided on 20 August 2009, the Court held that contractual provisions in a joint venture agreement taken together with termination provisions in a licence of IP rights were void since the effect of those provisions on insolvency was to deprive creditors access to assets and therefore contrary to public policy in the light of insolvency laws.

BUSINESS IMPACT

  • The deprivation principle sets out that “there cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and, on the happening of that event, go over to someone else, and be taken away from his creditors”. To deprive the creditors in this way would be contrary to public policy.
  • One must look at the effect of the deprivation provision and whether it applies in the context of insolvency to establish whether it is contrary to public policy.
  • The interlinking of a provision in a joint venture agreement ("JVA") that, on the occurrence of the insolvency of one joint venture partner (or a member of its group), permitted the other joint venture partner to serve a notice to acquire all of the shares in the joint venture company, with a provision that terminated a valuable IP licence on the service of that notice had the effect of depriving assets from creditors. The provisions were therefore void. Even though there was no intention by the parties to prejudice creditors the overall effect was to enable BBC Worldwide to acquire the shares (in a Woolworth's subsidiary) at an advantageous price, which was contrary to public policy.
  • The judge, Peter Smith J, commented that careful drafting of the JVA and the IP licence could have permitted BBCW to acquire the shares on the basis that the IP licence had been terminated.
  • Although a general insolvency clause that provides for termination of an IP licence by one party on the insolvency of the other (or a member of that other’s group) would be acceptable, care should be taken when drafting IP licences which have provisions that are triggered by insolvency events which could have the effect of depriving creditors of assets.

Facts

The dispute arose out of the insolvency of the Woolworth's group of companies. BBC Worldwide Ltd ("BBCW") and an ultimate subsidiary of Woolworths Group plc, WW Realisation 8 Ltd (referred to in the reported decision as "Media") entered into a joint venture agreement ("JVA") under which a joint venture company, 2 Entertain Limited (“2E”), was owned by Media (40%) and BBCW (60%). As part of the joint venture arrangements, BBCW granted to a subsidiary of 2E, BBC Video Ltd (“Video”), a perpetual licence of certain of its intellectual property rights under a Master Licence Agreement (“MLA”).

The JVA included a provision that provided that if Media or Woolworths Group suffered an insolvency event, then BBCW could serve a notice on Media requiring Media to sell to BBCW its shares in 2E at a price stated to be at fair value. The JVA also provided that on such an insolvency event, a termination clause in the MLA would apply. This termination clause in the MLA provided that if Media or Woolworths Group suffered an insolvency event and BBCW served the notice to acquire the shares in 2E, then the MLA would terminate. Woolworths Group suffered an insolvency event and BBCW served a notice on Media to acquire its shares and sought to terminate the MLA. The value of the shares in 2E were worth substantially less if Video no longer had the benefit of the licence from BBCW.

The matter came to court because the administrators of Media and Woolworths Group claimed that the reduction in the value of the shares in 2E as a result of the termination of the MLA would have the effect of providing less to the creditors of Media, than if the MLA continued to subsist. Depriving the creditors of assets in this way would contravene the deprivation principle.

The deprivation principle, as derived from the authorities, is that “there cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and, on the happening of that event, go over to someone else, and be taken away from his creditors”. To deprive the creditors in this way would be contrary to public policy.

Decision

Peter Smith J held that the interlinking between the provision in the JVA and the termination provision in the MLA were void since they fell foul of the deprivation principle. In coming to this conclusion the judge had particular regard to the British Eagle case [1975] which established that one must look at the effect of the deprivation provision and whether it applies in the context of insolvency to establish whether it was contrary to public policy. Thus, the interlinking of the provision in the JVA providing for the service of the notice to acquire the Media-owned shares with the provision in the MLA terminating the MLA in the event that the notice was served, had the effect of depriving assets from creditors and the provisions were therefore void. Even though there was no intention by the parties to prejudice creditors, the overall effect was to enable BBCW to acquire the Media-owned shares at an advantageous price which was contrary to public policy.

Comment

The judge went on to say that if the provisions in the agreements were not linked, the deprivation principle would not apply. He commented that careful drafting of the JVA and the MLA could have meant that BBCW could have acquired the Media-owned shares on the basis that the MLA had been determined.

Although a general insolvency clause that provides for termination of the licence by one party on the insolvency of the other (or a member of that other’s group) would be acceptable, care should be taken when drafting IP licences which have provisions that are triggered by insolvency events which could have the effect of depriving creditors of assets. Specialist advice should be sought.