Vol 8 (2011) - Issue 2

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The Nature and Scope of the Anti-Deprivation Rule in the English Law of Corporate Insolvency – Part One

Introduction

The classic description of the so-called anti-deprivation rule was provided by Cotton LJ in the case of Ex p Jay, where the rule was expressed in terms that 'there cannot be a valid contract that a man’s property shall remain his until his bankruptcy, and on the happening of that event shall go over to someone else, and shall be taken away from his creditors'. In spite of this seemingly straightforward formulation, the courts and commentators alike have struggled to elicit from the case law a coherent principle with well defined limits. Indeed the recent Court of Appeal case of Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd seems to have done more to highlight the uncertainties as to the nature and extent of the rule than it has to settle them.3 Leave to appeal to the Supreme Court in England has been given in this case and it may be that the Justices of the Supreme Court will provide additional clarification of the law in this area in 2011.

In the first part of this paper, I will seek to distinguish the rule from other rules and principles which operate in the English law of insolvency and therefore attempt to stem some sources of confusion. In the second part, I will go on to consider the scope of the rule.



Facts of the case

Perpetual involved two combined appeals to the Court of Appeal. The first arose out of the collapse of the global financial services group, Lehman Brothers in 2008. It involved a complicated synthetic collateralised debt obligation, by which a Lehman Brothers company set up a Special Purpose Vehicle ('the Issuer') in a tax-friendly jurisdiction, which sold notes to investors, including Perpetual Trustee. The Issuer used the proceeds of sale to purchase government bonds as collateral, which were vested in a trust corporation called BNY Corporate Trustee Services Ltd ('the Trustee'). The Issuer also entered into a swap agreement with another Lehman Brothers company by the name of Lehman Brothers Special Financing Inc ('LBSF'). The substance of the swap agreement was that LBSF would pay the Issuer the sums due to the noteholders in return for an amount equal to the yield on the collateral. This arrangement gave rise to a sort of credit insurance. The collateral was charged in favour of both the Trustee to secure the Issuer’s obligations to the noteholders and in favour of LBSF. The charge in favour of LBSF was to take priority over that in favour of the Trustee unless an event of default, as defined in the agreement, occurred and LBSF was the defaulting party. In this event, the priority would 'flip' and the charge in favour of noteholders would take priority. The events of default included the insolvency or default of LBSF and the insolvency of the ultimate parent company of LBSF, Lehman Brothers Holdings Inc ('LBHI'). The administrator of LBSF challenged the validity of the priority flip on the basis that it offended the anti-deprivation rule, by depriving LBSF’s estate of the priority that it enjoyed. Both at first instance and in the Court of Appeal, it was held that the anti-deprivation rule did not apply.

The second appeal in the Perpetual case, the Butters appeal, arose out of the administration of the Woolworths group of companies.