The underlying policy of the Insolvency Act 1986 is that all assets of an insolvent organisation must be made available for distribution amongst its creditors. However, the courts also have the power to prevent parties from contracting out of the statutory regime. This long established common law principle known as the anti-deprivation principle has been used by the courts over the years to strike down contractual provisions which attempt to do just that. The principle has received an airing in two recent High Court decisions.
Mayhew v King & Another (2010) concerned the scope of ‘assets’ covered by the principle. M engaged an insurance broker, T, to arrange insurance cover through C in connection with M’s haulage activities. The scope of the cover was found to be potentially inadequate (when M was sued by Mr Mayhew for substantial damages and C initially refused to provide cover) and this led to M suing T for negligence. The negligence claim was settled by M and T entering into an agreement under which T would be responsible for reimbursing to M 85% of any sums to be paid to Mr Mayhew The settlement agreement contained a termination clause with the effect that T would be released from its obligation to indemnify M, if M became insolvent.
M subsequently went into administration and M’s administrators assigned the benefit of the settlement agreement with T to C so that C could recover directly, on behalf of M, 85% of any sums payable on M’s behalf. C sought to enforce the settlement agreement against T but T relied upon the termination clause, the effect of which would be that the settlement agreement would come to an end, M would lose the benefit of the indemnity and M’s unsecured creditors would have to meet any shortfall rather than T.
C’s response was that the termination provision was unenforceable under the antideprivation principle. C claimed that the clause operated to permanently deprive M’s creditors of a valuable asset for distribution.
In response T argued that the anti-deprivation principle does not apply to a right to enforce an interest, in this case the indemnity, particularly in circumstances where the parties had negotiated the terms of the agreement themselves. The court however agreed with C and found that the termination provision in the settlement agreement offended against the anti-deprivation principle and was void as a result. The judge held that the principle could be applied to such rights created by a contract, even where the contracting parties had agreed limits to the duration of those rights. If the effect of the limitation essentially deprives an organisation’s creditors of the benefits of the indemnity on the organisation’s insolvency, then the limitation will be void.
This is a salient reminder that contractual limitations (for example in any guarantee) relating to insolvent events in any form of contract (particularly indemnities or other contracts which give rise to a right of legal action) are vulnerable to being struck down if the court considers that the intention and effect of the limitation is to deprive the insolvent company and its unsecured creditors of a valuable asset.
The anti deprivation principle has recently had a second airing, in the somewhat more high profile dispute concerning the Portsmouth City Football Club (and its administrators) and HMRC. At a recent high court hearing in which HMRC sought to have a company voluntary arrangement entered into by the club set aside, concerns were raised by HMRC that the so-called ‘football creditor’s rule’ fell foul of the anti deprivation principle. The football creditor’s rule (provided for within both the Premier League and Football League’s own rules) provides that when a football club is moved to administration, broadcast and league revenues that would otherwise be due to the club during that period are ring fenced for creditors of the club that are involved in the game itself, thereby depriving ‘non-industry’ unsecured creditors of the opportunity to derive any benefit from such revenue. The judge declined to make any ruling in relation to the compatibility of the football creditor’s rule with the anti deprivation policy but it is perhaps only a matter of time before such a challenge does materialise, in which case there may be further clarification or guidance of the extent to which the principle can be circumvented.