Vol 8 (2011) - Issue 3

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

In the second part of this article, I will consider the scope of the anti-deprivation rule in the English law of corporate insolvency. Particular consideration will be given to the case of Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd, the facts of which are stated in the first part of this article.



When will a purported deprivation be caught by the rule?

If the distinction, which is made by Worthington between the contracting-out rule and the anti-deprivation rule, is to be drawn, it must be considered at what stage a purported contracting-out or deprivation will be invalid. Given that, as discussed in the first part of this article, the contracting-out rule is no more than a reflection of the primacy of the insolvency legislation, that rule cannot have a wider reach than the provisions of the insolvency legislation itself. However, given that the anti-deprivation rule is a common law rule of public policy, would the rule invalidate a deprivation which was triggered by the mere insolvency of a company as opposed to the commencement of formal insolvency proceedings?

Part of the confusion has been formed by the conflation of the rule with the pari passu principle. It is evident that if the pari passu principle is seen as the basis for the anti-deprivation rule, the rule, like the pari passu principle will only operate in the context of formal insolvency proceedings. However, given that, the anti-deprivation rule is concerned with the conservation of the insolvent estate, it might at first glance seem sensible that the rule would apply to deprivations which occur prior to formal insolvency proceedings in order to protect the creditors of the insolvent company. Indeed a good example of this reasoning can be seen in the case of Fraser v Oystertec. In this case, Peter Prescott Q.C., sitting as a Deputy High Court Judge, held that an agreement which provided that a patent owned by a company would be assigned to a third party upon the company becoming unable to pay its debts was void. In support of his finding, the judge cited the nineteenth century case of Whitmore v Mason, in which Page Wood V-C held that the rule applied to deprivations triggered by mere insolvency and was not dependent on bankruptcy proceedings having been commenced. Page Wood V-C considered that if this was not the case, it would mean that 'the bankrupt laws might, in all cases, be defeated'. Apart from this case, there seems to be no authority in the case law to support the contention that the rule operates to invalidate deprivation provisions triggered by mere insolvency as opposed to the commencement of formal insolvency proceedings. It may be helpful however, to examine, as a matter of policy, whether it would be sensible and logical for the rule to apply to deprivations which occur upon mere insolvency.