In Justin Mayhew v (1) Philip King (2) Milbank Trucks Ltd (Defendants) & Chaucer Insurance plc (Third Party and Part 20 Claimant) v Towergate Stafford Knight Company Limited & Ors Sir Edward Evans-Lombe held that a term of a settlement agreement which stated that a right to an indemnity would cease if the party with the benefit of the indemnity went into administration was contrary to the anti-deprivation principle and would be struck out.
The claimant, Justin Mayhew (Mayhew) obtained a judgment for damages against Milbank Trucks Ltd (Milbank) in relation to a road traffic accident. Chaucer Insurance plc (Chaucer) was Milbank's insurer, but it refused to pay out due to a general exception contained in the relevant policy. Milbank therefore commenced proceedings against Towergate Stafford Knight Company Limited (Towergate), its brokers, for negligently mis-selling the policy. Milbank and Towergate subsequently entered into a settlement agreement, whereby Towergate agreed to indemnify Milbank for the payments it was due to make to Mayhew. The settlement agreement contained a clause, clause 11, which stated that if Milbank was placed into administration prior to any payment being made by Towergate, Milbank's right to an indemnity would cease to be effective. Milbank was placed into administration before any payment was made by Towergate. Towergate therefore refused to pay any indemnity under the settlement agreement. Milbank's administrators assigned Milbank's rights under the settlement agreement to Chaucer, which brought Part 20 proceedings against Towergate to enforce the settlement agreement and to seek a declaration that clause 11 of the agreement was invalid, as it was contrary to the anti-deprivation principle.
Sir Edward Evans-Lombe held that clause 11 was a clear violation of the anti-deprivation principle. The undertaking by Towergate to indemnify Milbank was clearly an asset of Milbank, which, in the absence of clause 11, would have been available to be realised by the administrators. The clause was not simply putting a time limit on the indemnity, rather, it sought to limit the obligation to indemnify by reference to an insolvency event. Clause 11 was therefore enforceable and Towergate was bound to indemnify Milbank in accordance with the settlement agreement.
The case re-iterates the well known anti-deprivation principle: a court will refuse to give effect to provisions of a contract where such provisions would achieve a distribution of assets of an insolvent company which ran contrary to the normal insolvency rules governing the distribution of assets between the creditors.