ON APPEAL FROM THE HIGH COURT OF JUSTICE
Sir Edward Evans-Lombe (sitting as a Judge of the High Court)
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE RIMER
LORD JUSTICE SULLIVAN
| FOLGATE LONDON MARKET LIMITED (formerly Towergate Stafford Knight Company Limited)
|- and -
|CHAUCER INSURANCE PLC
WordWave International Limited
A Merrill Communications Company
190 Fleet Street, London EC4A 2AG
Tel No: 020 7404 1400, Fax No: 020 7831 8838
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Mr Antony Zacaroli QC (instructed by Browne Jacobson LLP) for the Respondent
Hearing date: 24 January 2011
Crown Copyright ©
Lord Justice Rimer :
The agreement of 25 August 2006
'21 days after full and final determination, whether by judgment or settlement, on terms providing for payment of a lump sum, of all outstanding claims for damages and interest in the Justin Mayhew Claim together with agreement as to the liability for claimant's costs, whether those costs are to be paid at the same time as the damages or to be agreed or assessed at a later date; …'
Clauses 2 and 3, in a section headed 'Settlement', provided:
'2. The terms of this agreement set out below are in full and final settlement of any and each Claim or potential Claim which Milbank or [Folgate] may each respectively have against the other, arising in any way whatsoever from any matter connected directly or indirectly with the subject matter of the Action [meaning Milbank's claim against Folgate].
3. In consideration of [Folgate] agreeing to make the payments set out in clause 4 below and agreeing to take over conduct of the Justin Mayhew Claims as set out in clause 5 below, Milbank has agreed to a stay being imposed upon all further steps in the Action.
Clause 4 set out the payments that Folgate was to pay Milbank 'on the Due Date for Payment' and I have summarised them in paragraph  above.
'5. The parties agree that [Folgate] shall be entitled to take over the conduct of the defence of the Justin Mayhew Claim, to take such steps to defend or settle that claim as it thinks fit (without, for the avoidance of doubt, having to consult or obtain the consent of Milbank) and that [Folgate] may appoint its own solicitors, counsel and experts for that purpose. …
9. Milbank shall provide all assistance reasonably required by [Folgate]:
9.1 to conduct the defence of [the] Justin Mayhew Claim; and
9.2 to pursue any claim assigned to [Folgate] by clause 8. …
11. In the event that Milbank is placed in liquidation, administration or a receiver is appointed or a voluntary arrangement is proposed for the purposes of Part 1 of the Insolvency Act 1986, at any time prior to the date upon which any payment by [Folgate] under clause 4 is due to be made, Milbank's right to an indemnity from Folgate will cease with immediate effect and [Folgate] will automatically be released from all and any further obligation under the terms of this agreement. For the avoidance of doubt, the parties confirm that this agreement is not a contract of insurance.'
It is the validity of clause 11 that is in issue.
The judge's judgment
'108. In my judgment the critical distinction which emerges from those and other cases may be expressed in the following way. Where the asset of the insolvent company is a chose in action representing the quid pro quo for something already done, sold or delivered before the onset of insolvency, then the court will be slow to permit the insertion, even ab initio, of a flaw in that asset triggered by the insolvency process. By contrast, where the right in question consists of the quid pro quo (in whole or in part) for services yet to be rendered or something still to be supplied by the insolvent company in an ongoing contract, then the court will readily permit the insertion, ab initio, of such a flaw, there being nothing contrary to insolvency law in permitting a party either to terminate or adjust what would otherwise be an ongoing relationship with the insolvent company, at the point when it goes into an insolvency process.
109. Examples of the former type are the royalty stream in ex parte Mackay, which was the quid pro quo for a patent sold outright by the person who later became bankrupt, and the debt owed by Air France to British Eagle, which was for services already rendered by British Eagle to Air France prior to the commencement of its winding up.
110. Familiar examples of the latter category are leases and licences, where the right to enjoy the underlying asset accrues over time, in exchange, also over time, for payment of rent or fees, and which have always been terminable on bankruptcy without infringing the rule: see Perpetual at paragraph 64. …'
'Now, I apprehend that the law is too clearly settled to admit of a shadow of doubt that no person possessed of property can reserve that property to himself until he shall become bankrupt, and then provide that, in the event of his becoming bankrupt, it shall pass to another and not to his creditors.'
The court rejected the argument that there was anything exceptional about the case of a partnership agreement that enabled it to escape the principle.
'… If it were to be permitted that one creditor should obtain a preference in this way by some particular security, I confess I do not see why it might not be done in every case – why, in fact, every article sold to a bankrupt should not be sold under the stipulation that the price should be doubled in the event of his becoming bankrupt.
It is contended that a creditor has a right to sell on these terms; but in my opinion a man is not allowed, by stipulation with a creditor, to provide for a different distribution of his effects in the event of bankruptcy from that which the law provides. It appears to me that this is a clear attempt to evade the operation of the bankruptcy laws.'
Mellish LJ, in a concurring judgment, said, at page 648:
'… a person cannot make it a part of his contract that, in the event of his bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy law.'
Lord Justice Sullivan :
Lord Justice Sedley :