The normative and Jural meanings of the anti‐deprivation principle vis‐à‐vis freedom of contract

• Published date: 01 June 2022
• Author: Eugenio Vaccari
• Date: 01 June 2022
• DOI: http://doi.org/10.1002/iir.1453

RESEARCH ARTICLE

The normative and Jural meanings of the

anti-deprivation principle vis-à-vis freedom

of contract

Eugenio Vaccari

Department of Law and Criminology,

School of Law and Social Sciences, Royal

Holloway, University of London,

Egham, UK

Correspondence

Eugenio Vaccari, Department of Law and

Criminology, School of Law and Social

Sciences, Royal Holloway, University of

London, Egham Hill, Egham, Surrey,

TW20 0EX, UK.

Email: eugenio.vaccari@rhul.ac.uk

Abstract

Contracts and clauses negotiated by the parties with the

objective purpose of depriving the debtor of assets upon

insolvency contravene the collective, mandatory nature of

insolvency procedures and, consequently, the anti-

deprivation principle. This article provides a theoretical

conceptualisation of the normative meaning of the anti-

deprivation principle by marking its separation from the

principle of freedom of contract. If willingly and consis-

tently applied by courts, this conceptualisation could pro-

vide enhanced predictability regardingtheuseoftheanti-

deprivation principle in insolvency cases.

1|INTRODUCTION

Despite some notable exceptions,

1

there is widespread consensus in the insolvency community

that insolvency law should be primarily procedural in nature.

2

This is because rules valid only

in insolvency cases create tension. If a problem is solved only in this context:

The author is greatly indebted to Dr. Yseult Marique, Dr. Onyeka Osuji, Dr. Niall O'Connor and Dr. Johanna Hoekstra

for their insightful comments on earlier drafts of this article, and to Marcus Greet for his constructive criticism of the

manuscript and for his diligent proof-reading of this work. This article covers literature and case law published before

March 1, 2021. The usual disclaimer applies.

Received: 23 March 2021 Revised: 22 October 2021 Accepted: 22 February 2022

DOI: 10.1002/iir.1453

This is an open access article under the terms of the Creative Commons Attribution-NonCommercial-NoDerivs License, which permits

use and distribution in any medium, provided the original work is properly cited, the use is non-commercial and no modifications or

adaptations are made.

© 2022 The Author. International Insolvency Review published by INSOL International and John Wiley & Sons Ltd.

Int Insolv Rev. 2022;31:235–274. wileyonlinelibrary.com/journal/iir 235

“[t]hat ‘solution’is a cure which is probably worse than the disease. Indeed, it can be

hardly classified as a solution at all.”

3

The procedural nature of insolvency law restricts its scope to a last resort mechanism

4

that max-

imises returns to creditors and ensures a collective, fair and orderly distribution of assets and

proceeds to the claimants. If insolvency law does not amend substantive rights, parties (debtors

and creditors together) are encouraged to reach an agreement outside of insolvency. At the

same time, the same parties know that, should they fail to cooperate, any of them could com-

mence an insolvency procedure. Doing so would preserve the:

“relative value of particular non-bankruptcy entitlements instead of the rights

themselves.”

5

In line with this approach, this article assumes that insolvency procedures should not –where

possible –result in changes to the rights negotiated by the parties in solvent times. In accor-

dance, this article considers that insolvency law should be a last resort procedural mechanism

designed to maximise the stakeholders' (rather than creditors') wealth.

In this context, English

6

courts have developed and recently reaffirmed

7

the validity of a

long-standing concept: the anti-deprivation principle. Generally speaking, the anti-deprivation

principle is a common law rule that voids any arrangement designed to remove assets from the

insolvent debtor because of the debtor's insolvency and to the detriment of the cohort of credi-

tors.

8

The principle is:

“an important canon of insolvency law, for it subserves the principle of collectivity by

mandating the conservation of the insolvent estate.”

9

Nevertheless, it results in rules that are valid only in insolvency cases and that amend the sub-

stantive rights negotiated by the parties in solvent times.

Much has been written about the anti-deprivation principle both judicially

10

and academi-

cally.

11

Some have also offered a structural analysis of the principle's components.

12

Parliament

has added to this ancient common law principle by including several specific instances of trans-

action avoidance actions,

13

and the anti-deprivation principle is not coterminous with those

rules.

14

Courts and commentators have mainly approached the analysis of the anti-deprivation prin-

ciple in isolation by making reference to the specific facts of each case. Although the UK

Supreme Court has offered some guidance on when and how to invoke the principle,

15

it has

declined to formulate propositions of the situations where the principle can be used in deter-

mining matters.

16

Consequently, it has already been observed that the decision of the Supreme

Court in Belmont:

“inevitably contain[s] the seeds of further uncertainty under fresh circumstances

where the material elements may be different.”

17

Calls for a “common sense”application

18

that takes into consideration business practice

19

will

always fall on deaf ears absent any theoretical conceptualisation of this common law principle.

Courts and commentators have also overlooked the interaction of this principle with other

crucial aspects of corporate insolvency law, such as the principle of pari passu distribution. A

236 VACCARI

“state of confusion and uncertainty”

20

has emerged because of the overlap between the anti-

deprivation principle and the pari passu rule of distribution.

21

This has led to some courts

22

and

commentators

23

treating the anti-deprivation principle as resting on the principle of pari passu

distribution.

24

This is far from optimal, as the anti-deprivation principle deals with the rights of

the parties on the debtor's assets outside insolvency,

25

whereas the principle of pari passu distri-

bution deals with the rights of the parties on the proceeds generated by the sale of the debtor's

assets inside insolvency.

Finally, courts and commentators have also ignored the interaction of the anti-deprivation

principle with key contract law concepts, such as the principle of freedom of contract (and the

related concepts of sanctity of contract, freedom from contract and party autonomy).

It follows that there is a lack of principled and comprehensive research on the concept of

the anti-deprivation principle and its components, as commentators –with few exceptions

26

–

have focused on the idiosyncrasies

27

between, or analysis

28

of individual cases. This article fills

this scholarly gap by providing a theoretical conceptualisation of the anti-deprivation principle

in an insolvency context.

Legal concepts are needed to guide judges as they represent the “normative force that pro-

vides a reason for action or decision.”

29

Legal concepts are made of two elements: jural meaning

and normative meaning.

30

The jural meaning of the anti-deprivation principle, that is, the

rights and obligations associated with it, is clear: it is a general prohibition on any arrangements

designed to remove assets from the insolvent debtor because of the debtor's insolvency. The nor-

mative meaning of the principle, explaining what the principle should be aimed at protecting,

is debated. The normative meaning is generally associated with the process of allocating risks to

the sophisticated parties who tried to exploit the law at their own illegitimate advantage.

31

Yet,

the normative meaning needs to be clear for judges to apply the principle in a consistent and

predictable manner.

32

This article suggests a pluralist approach to defining the normative meaning of freedom of

contract and the anti-deprivation principle. This approach conflates established neoclassical

views with limited distributional goals. Unlike normative theories grounded on single norms,

33

the theory proposed in this article applies to all contracts and parties that enter into them. The

meta-principle followed in the definition of both freedom of contract and the anti-deprivation

principle is the protection and preservation of the parties' autonomy

34

to the highest possible

extent.

The anti-deprivation principle marks the separation between:

“the individualistic, private law model of freedom of contract on the one hand, and

the collectivist, public law model of insolvency law on the other.”

35

This article suggests that to identify the normative meaning of the anti-deprivation principle

and to avoid its strategic use, it is necessary to conceptualise the principle as the other side of

the coin of freedom of contract by marking its separation from it. By doing this, no substantive

restrictions of rights would be carried out in insolvency by means of the anti-deprivation princi-

ple, and the principle would be reconciled with the principle of freedom of contract.

The main contribution of this article is to provide a new conceptualisation of the anti-

deprivation principle, which prevents parties from contracting out of insolvency law without

unduly restricting the established, individualist and broad-ranging view of freedom and sanctity

of contract and the parties' substantive rights outside insolvency. As observed by distinguished

commentators,

36

and as evidenced later in this article with reference to the debate on the

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