In its recent decision in Belmont Park Investments PTY Ltd v BNY Corporate trustee Services Ltd and Lehman Brothers Special Financing Inc,[1] the Supreme Court ruled in favour of investors, clarifying the limits of the anti-deprivation rule and holding that a commercially sensible transaction entered into in good faith and without the intention to evade insolvency laws should not infringe the anti-deprivation rule.


The anti-deprivation rule derives from common law and has existed for nearly 200 years. In essence, the rule states that no party can reserve property to itself until it becomes insolvent, and then provide that, in the event of it becoming insolvent, the property shall pass to another party and not its creditors.

Any contract or arrangement that intentionally removes an asset from the common pool of assets available to creditors is often considered void as it has effectively deprived the creditors of a further asset which could increase the recovery for creditors. However, there are particular circumstances where such an agreement will be upheld and the anti-deprivation rule will not apply.

The application of this rule was recently considered by the Supreme Court.


Lehman Brothers Special Financing Incorporated (the Issuer) set up a number of special purpose vehicles (SPVs) through which they issued a series of loan notes to a number of investors including Belmont Park Investments PTY Ltd (Belmont). The monies invested were used to buy collateral which in turn vested in a trustee (the Trustee).

The Issuer entered into a number of credit default swap agreements (the Agreements) with the SPVs so that the proceeds of sale of the collateral would be paid to the Issuer in priority to Belmont. However, it was agreed that in the event of a default by the Issuer (including insolvency) the priority for payment would be reversed and Belmont would be paid in priority to the Issuer (the so-called "flip").

Following the demise of Lehman Brothers, the Issuer filed for bankruptcy protection in the U.S. and, as a result, the Trustee caused the Issuer to terminate the Agreements. The early termination of the Agreements triggered the payment of certain "unwind costs" due from the Trustee to the Issuer. However, because the Issuer had defaulted, and due to the priority flip, Belmont considered it was entitled to payment of the collateral in priority to the Issuer and brought proceedings against the Trustee and the Issuer to release the collateral held by the Trustee to Belmont in priority to the Issuer. The High Court and the Court of Appeal ruled in favour of Belmont. However, the Issuer challenged the validity of the provisions in the Agreements and claimed that they were invalid as they breached the principle of anti-deprivation by depriving the Issuer of recovering its unwind costs.

The decision

The Supreme Court confirmed the existence of the anti-deprivation principle but unanimously dismissed the Issuer's appeal holding that the provisions in the Agreements were effective and did not offend the principle of anti-deprivation. It was clear that the Agreements were entered into in good faith, made commercial sense and were never intended to purposefully evade insolvency laws to the detriment of creditors.

The Supreme Court affirmed that the anti-deprivation rule was well-established in law and that parties cannot intentionally contract out of insolvency legislation. However, autonomy of contract is at the heart of English law and the courts will give effect to contractual terms that are agreed between parties which do not offend this principle. The Court expressed that this is particularly pertinent for cases involving complex financial agreements such as those used in the above case.

What effect does this case have?

The Court defines the boundaries of the anti-deprivation rule: If a transaction makes commercial sense, is entered into in good faith and does not intend to evade insolvency laws, then the Court is likely to uphold the transaction.

The judgement illustrates the essential elements for application of the anti-deprivation principle:-

  • Good faith. For the anti-deprivation principle to apply, a deliberate intention to evade insolvency laws is required. However, it is not necessary to show that the parties subjectively intended to evade insolvency laws; rather, the intention is assessed objectively and can in certain obvious cases be inferred from the parties' actions.
  • Reasons for deprivation. The anti-deprivation rule is intended to operate only in cases where the deprivation occurs on the insolvency of the relevant debtor. If the trigger for the loss of assets is an event other than insolvency then the principle cannot be relied upon.
  • "Flawed assets". There are certain cases where one party will grant a proprietary interest in an asset that will automatically determine on the insolvency of the grantee. The courts often refer to these as "flawed assets". Such assets are said to fall outside the scope of the anti-deprivation principle. However, this line of reasoning is open to argument and the courts will examine the nature of the "flawed asset" before deciding whether the principle applies.
  • Source of assets. The source of the assets in question will be an important, and sometimes decisive, factor in determining whether the anti-deprivation principle applies. For example, if a contract provides that the party who is paying for certain assets should receive them following insolvency, the principle is less likely to apply.

Points to remember

This case should provide a welcome reassurance to investors that when entering into an arm's length commercial contract in good faith, the anti-deprivation principle is unlikely to invalidate its provisions. Parties should consider the following points when negotiating contracts:-

  • Parties cannot draft technical agreements which intentionally or inevitably result in the evasion of insolvency legislation.
  • The Court is likely to examine the purpose and substance of the transaction when deciding whether the rule applies, particularly in circumstances where the parties have negotiated the contract at arm's length.
  • It is clearly a desire of the Court to uphold a commercially legitimate transaction that has been entered into in good faith even if on the face of it, it conflicts with an established common law principle.