Strand, London, WC2A 2LL
B e f o r e :
(sitting as a Judge of the High Court)
| Justin Mayhew
|- and -
Milbank Trucks Limited
|- and -
|Chaucer Insurance Plc
Part 20 Claimant
|- and -
|Towergate Stafford Knight Company Limited (now Folgate London Market Limited)
Towergate Partnership Limited
|Part 20 Defendants
Mr Robin Knowles QC (instructed by Beachcroft LLP) for the Part 20 Defendants
Hearing dates: 19/4/10 – 20/4/10
Crown Copyright ©
Sir Edward Evans-Lombe :
The background facts
"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."
"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 18th 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."
"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)…"
"… 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."
"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."
"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)."
"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."
" 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.
 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.
 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  1 Ch 279 at 288-290 per Farwell J.
 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."
" 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  2 All ER 390,  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."
"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."
"(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."