England and Wales High Court (Chancery Division) Decisions

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		20/05/2010

Sir Edward Evans-Lombe :

1. In this case Chaucer Insurance, the Claimant in Part 20 proceedings ("Chaucer"), seeks declarations and orders that the first Part 20 Defendant ("Towergate") (the claim against the second part 20 Defendant having been discontinued) is liable to pay and should pay amounts due or to become due under an agreement ("the Settlement Agreement") made between Towergate and Milbank Trucks Limited ("Milbank"), in administration, in settlement of proceedings brought by Milbank against Towergate alleging the negligent mis-selling of an insurance policy. The decision in the case turns on the applicability of the principle known as the "anti-deprivation principle" ("the Principle") to the terms of the Settlement Agreement. That principle, which is not created by statute but is one of the common law, derived its existence from a line of decided cases to which I will refer, and operates to render ineffective arrangements between parties, one of which has entered into one of the forms of insolvent administration of its assets. In the present case, Milbank is insolvent and has had an administration order made against it. Chaucer seeks an order of the court that certain provisions of the Settlement Agreement be struck down under the Principle so that amounts due to Milbank from Towergate under that agreement, and which have been assigned to Chaucer, are recoverable by Chaucer which otherwise they would not have been. The leading case in the line of authority is the decision of the House of Lords in British Eagle International Air Lines Limited v Compagnie Nationale Air France [1975] 1WLR 758.

The background facts

2. On 26^th September 2001 the Claimant, Justin Mayhew ("Mr Mayhew"), suffered severe personal injuries when the load carried by a lorry belonging to Milbank slipped and struck Mr Mayhew's car. Milbank was insured by Chaucer but Chaucer declined to provide an indemnity in respect of Mr Mayhew's claim on the ground that the claim fell within a general exception provided for in the relevant policy. On 14^th September 2004 Mr Mayhew commenced proceedings against Milbank and the driver of the lorry and, on 14^th July 2005, obtained judgment against Milbank for damages to be assessed. At the same time, Milbank commenced proceedings against Towergate, the broker which had arranged the relevant policy for Milbank, on the ground that the fact that Chaucer was able to refuse to indemnify Milbank against Mr Mayhew's claim showed that Towergate had been negligent in the broker's services given to Milbank in arranging the insurance policy in question.
3. On 25^th August 2006 Milbank and Towergate entered into the Settlement Agreement in settlement of Milbank's claim, pursuant to which Towergate agreed (among other things) to pay (on the due date for payment as there defined – see clause 1.5) £99,646.69 to Milbank (being 85% of payments which Milbank had made to date to Mr Mayhew – see clause 4.1) and to indemnify Milbank in respect of its liability to Mr Mayhew for damages, interest and costs subsequently assessed to the extent of 85% of any sum payable by Milbank up to £1 million and 100% of any sum payable by Milbank in excess of £1 million (see clauses 4.2 and 6).
4. Central to the issue in the case is clause 11, which under the heading "termination" provides:-

"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 Towergate under clause 4 is due to be made, Milbank's right to indemnity from Towergate will cease with immediate effect and Towergate 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."

5. On 4^th November 2008 Milbank went into administration. I was informed that it was and is insolvent.
6. On 19^th January 2009 Chaucer was joined as a Third Defendant to the proceedings in its capacity as insurer and so liable to meet any final judgment obtained by Mr Mayhew against Milbank under section 151 of the Road Traffic Act 1988: see the order of Judge Yelton in the Cambridge County Court. Also on 19^th January 2009 Milbank, by its joint administrators, assigned to Chaucer all its interest in the Settlement Agreement. It is common ground that this assignment carried with it the right to challenge the validity of clause 11 of the Settlement Agreement under the Principle in the same way as would have been open to the Administrators. At the same time, Milbank ceded to Chaucer the conduct of the defence of Mr Mayhew's claim against Milbank.
7. On 12^th February 2009 Chaucer commenced these Part 20 proceedings against Towergate, seeking to enforce the Settlement Agreement and, in particular, its provisions indemnifying Milbank against Mr Mayhew's claim. In those proceedings, on 19^th March 2009, Towergate filed a defence relying on clause 11 of the Settlement Agreement as releasing it from any liability to pay and/or indemnify Milbank in respect of Mr Mayhew's claim by reason of Milbank's supervening insolvent administration.
8. On 3^rd June 2009 Mr Mayhew's claim against the Defendants was stayed on terms that Chaucer, on its own behalf and on behalf of the other Defendants, pay £640,000 to Mr Mayhew by way of damages, and £75,000 on account of Mr Mayhew's costs of his claim. Accordingly, the "due date for payment" under the Settlement Agreement pursuant to clause 1.5.1 was 24^th June 2009.
9. On 16^th June 2009 these proceedings were transferred from the Cambridge County Court to the Chancery Division of the High Court.
10. It is Chaucer's contention in this court that, since clause 11 of the Settlement Agreement operates to render the benefits conferred on Milbank by clause 4 defeasible in the event of Milbank being placed in insolvent administration, it offends against the Principle and so is to be struck down with the effect that Milbank, and so its assignee Chaucer, can enforce the provisions of clause 4 against Towergate free from the provisions of that clause.
11. It was Mr Knowles QC's submission on behalf of Towergate that the Principle does not apply where the asset of the insolvent sought to be enforced is a chose-in-action, such as an agreement to indemnify, and the clause operating as a defeasance on insolvency is part of that agreement. It was his submission that clause 11 of the Settlement Agreement operated to put what was in effect a time limit on the indemnity conferred by clause 4. It would have been open to the parties to the Settlement Agreement to have time-limited the indemnity by reference to a period or a date. They chose to limit the period of the indemnity by reference to an event, namely the onset of Milbank's insolvency, but there was no reason to treat such a limit any differently from a specific time limit. To ask the court to strike down clause 11 was therefore to ask it to reconstitute the chose-in-action created by the Settlement Agreement extending the enforceability of the indemnity beyond the limit originally set by the parties to the agreement. The authorities, upon which the Principle depended, did not contemplate this situation.
12. In the course of argument four cases were cited to me from the line of authority establishing the Principle, Ex parte Mackay re Jeavons (1873) LR 8 Ch App 643, approved and relied on in the British Eagle case ibid, the decision of Mr Justice Neuberger, as he then was, in Money Markets International Stockbrokers Limited (in liquidation) v London Stock Exchange Limited & another [2001] 2 BCLC 347 and Perpetual Trustee Company Limited v BNY Corporate Trustee Services Limited [2010] BCC 59, and Butters v BBC Worldwide Limited [2009] EWCA Civ 1160, heard together, where the lead judgment was given by Lord Neuberger as Master of the Rolls.
13. It is a longstanding principle of insolvency law that a court will refuse to give effect to provisions in a contract which achieve a distribution of the insolvent's property which runs counter to the principles of insolvency legislation, i.e. which results in a distribution of the assets of the insolvent other than equally in proportion to their provable debts. See per Lord Cross in the British Eagle case at page 779E. At paragraph 32 of his judgment in the Perpetual Trustee Company case, Lord Neuberger says:-

"32. The rule has been considered and applied in a number of cases at first instance and the Court of Appeal going back into the 18^th century, and probably earlier, although the observations of Lord Eldon LC in Wilson v Greenwood (1818) 1 Sw. 471, 482 have often been take as the starting point. It is not entirely easy to identify the rule's precise limits, or even its precise nature, from these cases, as the reasoning in the various judgments in which the rule has been considered is often a little opaque and some of the judgments are a little hard to reconcile."

14. Lord Neuberger then proceeds to cite a large number of those authorities and then continues at paragraph 43:-

"43. All these decisions… related to bankruptcy. It is common ground, at least at this level that the rule exists and applies equally to liquidation… It is also common ground that the rule also applies where the company concerned goes into administration (at least where, as in the Butters case, the administration is effectively for the purpose of maximising the return on the insolvency and will lead to a winding-up order)…"

15. Despite Lord Neuberger's comments, it is clear, as appears from the British Eagle case and from his own affirmation of the Principle in the Perpetual Trustee Company case, that the Principle exists and is applicable in what the court may consider an appropriate case.
16. In his judgment in the Perpetual Trustee Company case, Lord Justice Patten described the Principle in the following terms:-

"… a common law rule of public policy that the property of an insolvent person must be administered for the benefit of his creditors in accordance with the provisions of what is now the Insolvency Act 1986. Consistently with and as part of this rule, the individual bankrupt or insolvent company may not contract at any time, either before or after the making of the bankruptcy or winding-up order, for its property subsisting at that date to be disposed of or dealt with otherwise than in accordance with the statute. Put another way, it is not possible to contract out of the Act."

17. In the Mackay case Jeavons, the debtor, had entered into three simultaneous agreements with Messrs Brown and Co. and Cammell and Co. ("the counterparties"). In the first, Jeavons assigned a patent to the counterparties in return for royalty payments from them. In the second, he mortgaged factory premises to the counterparties as security for a loan. In the third, the counterparties agreed not to enforce their security but would instead satisfy the loan by retaining one half of the royalties due from the counterparties to Jeavons. The third agreement contained an additional provision that upon Jeavons' bankruptcy the counterparties would be entitled to retain the whole of the royalties due from them to Jeavons to repay the loan until it was discharged. The Court of Appeal held that the latter provision was void under the Principle. In his judgment at page 647 of the report, Lord Justice James said:-

"A man is not allowed by stipulation of the creditor to provide for a different distribution of his effects in the event of bankruptcy from that which the law provides."

18. It is Chaucer's case that the present is a stronger case under the Principle than the Mackay case. In the present case, by contrast with the Mackay case, clause 11 operates to deprive the Administrators permanently of the amounts payable under clause 4 of the Settlement Agreement whereas, in the Mackay case, the insolvent estate of Jeavons was deprived of royalty payments only up to the amount of the debt due from Jeavons to the counterparties.
19. At paragraph 44 of his judgment in the Perpetual Trustee Company case, Lord Neuberger summarises the British Eagle decision of the House of Lords as follows:-

"44. In British Eagle, reversing Templeman J and a unanimous Court of Appeal, the House of Lords, by a bare majority, decided that a clearing house arrangement between a large number of airline companies relating to debts arising as between them was ineffective as against the liquidator of one of the companies, British Eagle, which had gone into liquidation. As explained by Lord Cross of Chelsea (with whom Lord Diplock and Lord Edmund-Davies agreed), this conclusion was reached on the ground that, insofar as the arrangement purported to apply to debts which existed when the members of the company passed the resolution to go into creditors' voluntary liquidation, it would have amounted to contracting out of the statutory requirement that the assets owned by the company at the date of its liquidation should be available to its liquidator, who should use them to meet the company's unsecured liabilities pari passu, under s.302 of the Companies Act 1948 (now effectively re-enacted as s.107 of the Insolvency Act 1986)."

20. Their Lordships treated the clearance process with regard to transactions entered into in September as having been "completed" on 4^th November and thus not affected by the Principle and so the September transactions of British Eagle were not to be re-opened. As to subsequent transactions, the majority found that because, by joining the clearance system, an airline submitted its debts and credits with other airlines, members of the system, to an accounting process having effect only between the system's members, where a member became insolvent, then, in respect of transactions submitted to the system for clearance which clearance had not been completed, the insolvent member had agreed to a realisation of its debts and credits which would result in a distribution to creditors other than that which would have resulted from its liquidator realising those debts and credits and applying them for the benefit of its creditors generally. See per Lord Cross at page 780F of the report applying the principles of the Mackay case.
21. In the Money Markets case, Mr Justice Neuberger, as he then was, had before him a claim to recover for the creditors of an insolvent member of the Stock Exchange a share, referred to as a "B" share, which it was a condition of membership of the Exchange that all members acquire. Under the Articles of the Stock Exchange, "B" shares were only to be transferable to and held by member firms or the share trustee and no consideration was to be paid or given for the transfer of any such share except as the directors might from time to time require. Article 803 provided that a "B" shareholder which ceased for any reason to be a member firm, or its trustee in bankruptcy, was bound, when called upon by the directors to do so, to transfer the "B" share. Shortly after the member firm had been put into compulsory liquidation, the Stock Exchange required the liquidator to transfer the firm's "B" share. In the dispute which followed, the liquidator deployed the Principle to attempt to defeat the claim to recover the share or its value, arguing that the provision requiring a member to transfer its "B" share on ceasing to be a member, which necessarily followed its insolvency, offended against the Principle. Mr Justice Neuberger found that the argument failed. As summarised in the head note of the case, he found that:-

"Although the transfer of an asset on the condition that it would re-vest in the transferor in the event of the transferee's insolvency was generally invalid, a deprivation provision which might otherwise be invalid in light of the anti-deprivation principle could be held to be valid if the asset concerned was closely connected with or, more probably, subsidiary to, a right or other benefit in respect of which a deprivation provision was valid. If such a provision did not offend against that principle, then (subject to there being no objection to it) it would be enforceable against a trustee in bankruptcy or on a liquidation just as much as it would have been enforceable in the absence of an insolvency. In the instant case, a member firm's ownership of a 'B' share in LSE could not realistically be treated as ownership of a free-standing asset, at least until demutualisation. A member firm's principal or real asset was membership of the stock exchange, and its ownership of a 'B' share in LSE was effectively ancillary to that membership. Such membership was a personal thing, incapable of uncontrolled transfer, and expulsion from membership would normally follow default. Upon expulsion, all interest of the defaulting member in the property of the organisation ceased. Thus, although the disputed share was a thing separate altogether from LSE's property, the nature and character of LSE and the stock exchange was such that in the case of a defaulting member who was expelled from membership, no interest in his share remained in himself and none could pass to his assignee. Once LSE had demutualised, so that its shares were effectively independent of membership and not subject to restrictions on disposal by the owner, the exercise of the deprivation provision would probably have fallen foul of the anti-deprivation principle."

22. Mr Zacaroli QC for Chaucer drew my particular attention to a passage in the judgment of Mr Justice Neuberger starting at paragraph 91 of the report as follows:-

"[91] Mr Mann argues on behalf of LSE that, where, as the original part of the arrangement pursuant to which a right or property (an 'asset') is granted, there is a provision under which the grantor can in some way confiscate the asset ('a deprivation provision'), on an insolvency or otherwise, it is enforceable even if the grantee is insolvent. Another way of putting the same point, possibly in a more limited way, is that, where it is an inherent feature of an asset from the inception of its grant that it can be taken away from the grantee (whether in the event of his insolvency or otherwise), the law will recognise and give effect to such a provision. A property or right subject to removal in the event of insolvency has been described by Oditah ((1992) 108 LQR 459 at 474) as a 'flawed' asset.

[92] This has the merit of being a simple and readily comprehensible proposition, and one which is easy to apply. However, it does not seem to me to be correct. First, it would represent such an easy way of avoiding the application of the principle that it would be left with little value. In other words, it seems to me that, if I accepted Mr Mann's simple proposition, the effect would be to emasculate the principle which, at least to Professor Goode, is one which should be more widely, rather than more narrowly, applied. In his book (p 150) he not only described '[t]he distinction between recapture of an [interest] transferred outright and termination of a limited interest' as 'redolent of [a] highly artificial distinction'. He went on to describe as 'sound' s541(c)(i) of the US Bankruptcy Code which he said, 'roundly declares ipso facto termination clauses ineffective, however they are formulated'. Professor Goode also suggested that this 'is a sound rule and one which English courts could sensibly follow'. I appreciate that there is a real argument to support the contrary view, namely that the principle should be abrogated on the basis that it is not for the courts but for the legislature to override contractual terms. This argument could be said to have particular force in light of the sophisticated and detailed legislative apparatus enshrined in the Insolvency Act 1986, and Insolvency Rules 1986. However, that is not an approach open to me in view of the authorities to which I have referred.

[93] Secondly, it would be inconsistent with the apparently well-established principle referred to by Snell's Equity, Underwood and Hayton, and Professor Goode. That principle, to quote from Professor Goode, is that 'the transfer of an asset … upon the condition that the asset is to revest [on] liquidation [of the transferee] is void'. It is true that this rule can in some cases (especially relating to real property) be explained by reference to the provision being repugnant or offending the rule against perpetuities. However, such arguments do not apply to personal property, see, for instance, Borland's Trustee v Steel Bros & Co Ltd [1901] 1 Ch 279 at 288-290 per Farwell J.

[94] Thirdly, it appears to me that an analysis of the authorities undermines the notion that the initial inclusion, and subsequent operation, of a deprivation provision in the event of insolvency is ipso facto effective in an insolvent situation. In Whitmore v Mason, there was a single contract pursuant to which Mr Mason had paid his share of capital into a partnership, had acquired his interest in the partnership assets, including the mining lease, and had agreed that, in the event of his bankruptcy, his interest in that lease would effectively be forfeited for no consideration to his partners. The deprivation provision was thus an inherent part of the bargain pursuant to which he obtained his interest in the lease; the beneficial interest which was accorded to him by the partner who acquired the lease contained what amounted to a provision for forfeiture in favour of the surviving partners in the event of the bankrupt's insolvency. In my judgment, if LSE's first argument is correct, Page Wood V-C ought to have concluded that the effective confiscation of the bankrupt's equitable interest was effective, and yet he did not."

23. At paragraph 97 of his judgment Mr Justice Neuberger describes a "refinement or narrowing of the proposition" being put forward by counsel for LSE which is not relevant for consideration in this case. He then continues at paragraph 99 as follows:-

"[99] It also appears to me that, whether expressed in the broader or narrower way, LSE's contention is difficult to reconcile with the majority view of the House of Lords in British Eagle International Airlines Ltd v Cie Nationale Air France [1975] 2 All ER 390, [1975] 1 WLR 758. At the time that the plaintiff agreed to render the relevant services to the defendant, both of them were bound by the IATA clearing house arrangements, and accordingly at the very moment they entered into their agreement, it was an inherent part of their contractually enforceable arrangement that, in due course, when the clearing house accounts came to be drawn up, there would be no debts as between the plaintiff and the defendant, merely debits or credits as between each of them and IATA. Mr Mann argues that the difference between the majority view expressed by Lord Cross and the minority view expressed by Lord Morris was attributable to the difference between their respective judicial analyses of the interrelationship between the agreement between the plaintiff and the defendant for the provision of the specific services, and the overarching arrangement between various airlines, including the plaintiff and the defendant, and IATA. I am not persuaded that that is correct."

24. The judge then expresses his conclusion as to this submission by LSE at paragraph 100 by saying:-

"Accordingly, convenient and simple though it may be, I do not consider that the suggestion that a deprivation provision on insolvency or otherwise is valid provided it is included as part of the initial bargain (or as an inherent part of the asset) is correct."

25. I do not need to refer further to the Perpetual Trustee Co case in the Court of Appeal. The facts in that case were extremely complex and bear no resemblance to the facts of the present case. I have already had resort to it for the statements of principle contained in it which seem to me to be relevant to that which I have to decide.
26. At paragraph 11 and following above I summarised Mr Knowles QC's submission for Towergate as to why the Principle does not apply to clause 11 of the Settlement Agreement. Under the heading "The correct analysis" he provides his own summary in five numbered paragraphs at the conclusion of his written submissions as follows:-

"(1) It should in principle be open to Folgate to agree the length of time for which, and circumstances in which, its promise would apply.

(2) Submission (1) has particular force where, as here, the subject matter of the Clause is a promise of indemnity (rather than a more specific form of property or asset). In substance the case is concerned with the duration of a negotiated contractual promise, not the relinquishment of an asset.

(3) Generally, contracts should be enforced in accordance with their terms. There is no allegation in the present case that the Clause is unfair (with relevant legislation or regulation) or that agreement to it was a breach by the directors (or officers) of Milbank of any fiduciary duty.

(4) Chaucer's purchase from Milbank by the Deed of Assignment was the purchase of Milbank's rights under an agreement (the Agreement) that included Clause 11.

(5) Even to hold that the indemnity was still in force (and leaving aside the Deed of Assignment) would not make the proceeds available to the general body of Milbank's creditors. The proceeds would effectively be 'earmarked' in connection with Mr Mayhew's claim."

27. In the light of the authorities cited to me I am not able to accept Mr Knowles' first submission in its present unqualified form. It is not in issue that the obligation to pay and the undertaking to indemnify Milbank contained in clause 4 of the Settlement Agreement was an asset of Milbank which, in the absence of the provisions of clause 11, would have been available to be realised by the Administrators for the benefit of Milbank's creditors. It seems to me that there is an essential difference between a simple time limitation on the enforceability of provisions such as those contained in clause 4, by reference to a date or a defined period, and a limitation by reference to the event of the commencement of an insolvent administration when one is considering the applicability of the Principle. Indeed, a limitation of an indemnity by reference to a time period in a way which would lead a court to conclude that that period had been fixed deliberately to remove the asset from proving creditors in an impending insolvency administration might also persuade a court to strike down such time limitation provision applying the Principle. In agreement with Mr Zacaroli's submissions, to find otherwise would seem to me to provide a means whereby the application of the Principle could be avoided in a large number of cases where in the past it has been applied. Treating the obligation of the counterparties in the Mackay case, and thus the asset of Jeavons, as a simple obligation to pay money resulting from the exploitation of the patent in that case, it might have been argued that the provisions of the third "indenture" or "deed of arrangement", making the payment of royalties cease on the bankruptcy of Jeavons, were nothing more than provisions putting a time limit on the period during which the counterparties were bound to pay full royalties to Jeavons, which limitation formed part of the original bargain between Jeavons and the counterparties. If correct, the result of that case would have been different.
28. It follows that in my judgment I do not accept that the provisions of clause 11 are the equivalent of a time limitation on the duration of the obligations under clause 4 and I do not accept the effect of Mr Knowles' submissions under paragraphs (1) and (2).
29. In my judgment, Mr Knowles' submissions under paragraph (3) cannot stand with the passages in the judgment of Mr Justice Neuberger in the Money Markets case which I have set out above. Mr Justice Neuberger rejected the proposition that a contractual provision forming part of a valuable obligation to a counterparty making it terminable on insolvency, but which had formed part of the arrangement from its inception, was immune from the application of the Principle. I am not bound by his decision and the passage which I have quoted was obiter, but I respectfully agree with it. Paragraph (4) is ancillary to paragraph (3). As to paragraph (5), although I initially had some doubts about the ability of an assignee from an administrator to step into the shoes of that administrator in proceedings so as to render the assignee able to take advantage of arguments based on public policy in the administration of a debtor's affairs, I am satisfied that that was the effect of the assignment of the administrator's rights to Chaucer not least because it appears to have been common ground between the parties. It seems to me therefore that paragraph (5) of Mr Knowles' summary does not arise.
30. For these reasons, in my judgment, Chaucer is entitled to the declarations and orders sought against Towergate, now known as Folgate London Market Limited, in these Part 20 proceedings. I will hear counsel on the form of the order which follows.