A Statutory Basis for the Anti‐Deprivation Rule?

Date01 June 2014
DOIhttp://doi.org/10.1002/iir.1221
Published date01 June 2014
A Statutory Basis for the Anti-Deprivation
Rule?
Nishad Kulkarni*
,
Fifth Floor Selborne Chambers, Sydney, Australia
Abstract
This article argues that material confusions remain in the English anti-deprivation rule.
It begins by considering the statutory framework and demonstrates that there are a
number of distinct positions as to the legal foundation of the rule. In examining these
positions, of particular concern is the relationship between the rule and the pari passu
principle and the notion that the rule serves a broader collectivity principle inherent in
insolvency law. The article seeks to identify the proper basis of the rule, thereby
shedding light on the policy that the rule is intended to protect. It contends that while
it is possible, consistently with authority, to rationalise the rule on a particular footing,
the uncertainties under the existing law must be resolved by legislative reform.
Copyright © 2014 INSOL International and John Wiley & Sons, Ltd
I. Introduction
A series of English decisions
1
concerning the validity, where corporate insolvency
has supervened, of contractual provisions in important commercial agreements
2
have put the spotlight back on an old common law principle, now known as the
anti-deprivation rule. Given the signicance of the rule to the operation of nancial
markets, reliant as they are upon certainty in contractual dealings, it is unsurprising
that considerable efforts have been made, in the cases
3
and in academic writing,
4
* E-mail: nkulkarni@selbornechambers.com.au
BCom (UNSW), LLB (Hons) (UNSW), LLM (Dist)
(LSE); Barrister-at-Law, NSW, Australia.
1. Folgate London Ma rket Ltd v Chaucer Insurance pl c [2011]
EWCA Civ 328, [2011] Bus LR 1327 (Folgate); Belmont
Park Investments Pty L td v BNY Corporate Trustee Ser vices Ltd
[2011] UKSC 38, [2012] 1 AC 383 (Belmont); Lomas
v JFB Firth Rixson Inc [2012] EWCA Civ 419, [2012]
2 All ER (Comm) 1076 (Lomas); Revenue and Customs
Commissioners v Football League Ltd [2012] EWHC
1372 (Ch), [2012] Bus LR 1539 (Football League).
2. Respectively, an indemnity agreement, a synthetic
securitisation arrangement,the ISDA MasterAgreement
and the articles of association of a company organising
football competitions.
3. Including the lower court decisions in Belmont
(n 1) (Perpetual Trustee Co Ltd v BNY Corporate Trustee
Services Ltd [2009] EWCA Civ 1160, [2010]
Ch 347 (Perpetual); Perpetual Trustee Co Ltd v BNY
Corporate Trustee Services Ltd [2009] EWHC 1912 (Ch),
[2009] 2 BCLC 400) and Lomas (n 1) (Lomas v JFB Firth
Rixson Inc [2010] EWHC 3372 (Ch), [2011] 2 BCLC
120 (JFB)).
4. LC Ho, The principle against divestiture and the pari
passu fallacy(2010) 25(1) Journal of International Banking
and Financial Law 3-8; P Sidle, Taming the unruly horse:
Copyright © 2014 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 23: 73100 (2014)
Published online 13 June 2014 in Wiley Online Library
(wileyonlinelibrary.com). DOI: 10.1002/iir.1221
to clarify the nature and limits of the rule. Despite these efforts however, this article
contends that materialconfusions remain in the law in this area. It demonstrates that
there are a number of distinct positions as to the legal foundation of the rule under
English law. It argues that the operation of these different positions has led to an
incoherent application of the rule. The article contends that it is necessary to place
the rule on a conceptually sound legal footing and reviews options for reform.
Section II undertakes the task of locating the precise legal basis o f the
anti-deprivation rule. It be gins by explaini ng the statutor y setting within w hich
consideration of t he rule must take place in modern ins olvency law. In this regard,
the starting point i s whether and to what extent a footing for t he rule is to be found
in the provisions of the Insolvency Act 1986 or the Insolvency Rules 1986.
5
By
taking this approach, it is possible to identify ve distinct positions for the basis
of the rule. Each position is examined in turn.
In the course of this examination, a matter that looms large is the relationship
between the rule and the so-called pari passu principle, a principle expressly found
in legislation. Prior to the decision of the Supreme Court in Belmont,wherea
distinction was drawn between the two, English courts had proceeded on the basis that
there was a single principle in operation.
6
Although Belmont has provided some
clarication,it is argued that confusions remain inthe interplay betweenthe two prin-
ciples. Attention is also paid to the notion that the rule serves a broader collectivity
principle inherent in insolvency law and underpinned by particular statutory provi-
sions. It is shown that identication of these provisions is of critical importance to
the sphere of operation of the rule. This discussion also explains why the proposition
that the rule should apply upon factual insolvency has sometimes found favour.
7
Having identied and examined the different positions, it is contended that the
only satisfactory way forward is express, statutory recognition. Section III briey
surveys how this has been done in the USA and Australia, before analysing a proposal
to incorporate into the Insolvency Act a statutory anti-deprivation rule that reects the
existing body of case law.
contractual invalidity and the anti-deprivation rule
(2010) 4(1) Law and Financial Markets Review 41-47;
A Henderson, Perpetual and the principle against
divestiture outside insolvency proceedings: a response
(2010) 25(4) Journal of International Banking and
Financial Law 224-226; RM Goode, Perpetual Trustee
and Flip Clauses in Swap Transactions(2011) 127
Law Quarterly Review 1-13 (Goode I); S Worthington,
Insolvency Deprivation, Public Policy and Priority
Flip Clauses(2011) 7(1) International Corporate Rescue
28-39 (Worthington I); S Worthington, Making Sense
of Arguments about the Anti-Deprivation Rule
(2011) 8(1) International Corporate Rescue 26-39
(Worthington II); G Moss, Should British Eagle be
extinct?(2011) 24(4) Insolvency Intelligence 49-54; T
Cleary, Perpetuating Uncertainty: The Anti-Deprivation
Principle and Contractual Rights in the Post-Lehman
World(2011) 20 International Insolvency Review
185-218 (Cleary I); T Cleary, Lehman Brothers and
the anti-deprivation principle: current uncertainties
and proposals for reform(2011) 6(4) Capital Mar kets
Law Journal 411-449 (Cleary II); S Worthington,
Testing the anti-deprivation rule: a response to
Lehman Brothers and the anti-deprivation principle:
current uncertainties and proposals for reform
(2011) 6(4) Capital Markets Law Journal 450-455
(Worthington III); S Worthington, Good Faith,
Flawed Assets and the Emasculation of the UK
Anti-Deprivation Rule(2012) 75(1) Modern Law
Review 112-121 (Worthington IV); RM Goode, Flip
clauses: the end of the affair?(2012) 128 Law Quarterly
Review 171-178 (Goode II).
5. SI 1986/1925. The Act and Rulesare abbreviated to
IA 1986 and IR 1986respectively in footnote references.
6. See Worthington IV (n 4) 112. E.g. Perpetual (n 3);
Money Markets International Stockbrokers Ltd v London Stock
Exchange Ltd [2002] 1 WLR 1150 (Money Markets).
7. See e.g. Fraser v Oystertec plc [2003] EWHC 2787
(Ch), [2004] BPIR 486 (Oystertec) [119]; Ho (n 4) 5-7;
Worthington I (n 4) 34.
International Insolvency Review74
Copyright © 2014 INSOL International and John Wiley & Sons, Ltd Int. Insolv. Rev., Vol. 23: 73100 (2014)
DOI: 10.1002/iir

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