One of the many issues which arose from the collapse of Lehman Brothers was whether “flip provisions”, which reverse a swap counterparty’s priority in the order of payment on insolvency, were invalid on the basis that they contravened the anti-deprivation principle.  This is a long-established common law principle which seeks to prevent an insolvent party from arranging its affairs to frustrate the legitimate claims of creditors.

The leading Supreme Court judgment from Lord Collins has now clarified the limits of the principle by finding that the principle does not apply to commercial transactions carried out in good faith and if the trigger is an event other than insolvency.  The Supreme Court’s position is opposite to that reached by US courts and arises from the English courts’ general desire to give effect to contracts, particularly where sophisticated parties have entered into complex financial arrangements.