In September 2009 we reported on the first instance decision in Butters and ors v BBC Worldwide Ltd and ors, accessible here in which 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. The Court of Appeal has now reversed this decision.

Business impact

  • The anti-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.
  • At first instance, Peter Smith J held that the interlinking of (i) 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 (ii) a provision that terminated a valuable IP licence on the service of that notice, had the effect of depriving assets from creditors and were therefore void.
  • However the Court of Appeal has now held that the provision in the IP licence entitling the licensor to determine the licence in the event of the licensee's insolvency was unobjectionable, even if it took effect after the insolvency of the licensee, since it merely involved the termination of the licensee's limited interest.
  • The provision in the JVA provided for the shares to be acquired, in effect, at market value. This could not be objectionable. Since each provision was independently acceptable, they could not be objectionable because they exist together.
  • The Court of Appeal also held that the anti-deprivation rule has no application where the deprivation has been effected by the time the winding-up (or administration) order is made against the company which is deprived. As such, the anti-deprivation rule could be avoided by careful drafting.
  • The Court of Appeal's decision, further emphasises that care should be taken when drafting IP licences and other agreements 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

At first instance 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 anti-deprivation principle. However, on appeal, the Court of Appeal held that the two provisions were each unobjectionable and, as such, taken together, the provisions could not be objectionable. In coming to this conclusion the Court of Appeal referred to the leading case on the anti-deprivation rule, British Eagle International Airlines Ltd v Compagnie Nationale Air France [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.

Comment

The Court of Appeal stated that the anti-deprivation rule could be avoided by careful drafting and that it was ultimately up to Parliament to legislate against anti-deprivation devices in the insolvency field, as it has already done in sections 238 (transactions at an undervalue) and 239 (preferences) of the Insolvency Act 1986. As such, when considering contractual provisions relating to the effects of insolvency on IP rights, specialist advice should be sought.