Magoosh GRE

Anti-Deprivation Rule – Exam Notes

| May 9, 2012 | 0 Comments

The anti-deprivation rule, also known as the subordination or flipping rule, is a common law rule of public interest where one party cannot contractually agree that his assets on insolvency will become property of another party.

Factual Scenario: A owes B 50p, as security for that loan A contracts with B that should A go insolvent, A’s watch belongs to B.

  • Such a clause would unfairly deprive the insolvent estate, therefore creditors of assets.

 

  • British Eagle International Airlines Ltd v Cie Nationale Air France [1975] 1 WLR 785

This is the leading case for pronouncement of the courts on this rule.

Lord Collins for the House of Lords identified four main pillars of the rule:

–          An intention to evade insolvency laws.

–          Deprivation on insolvency.

–          The “flawed asset” analysis.

–          Substance of economic interests.

 

  • However, in Belmont Park Investments PTY Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc [2011] UKSC 38 Lord Collins applied this model and found the flip provisions to be valid.

 

  • Administrators of Lehman Brothers International (Europe)) v JFB Firth Rixson Inc and others [2010] EWHC 3372

 

–          Saw the emergence of the quid pro quo test as a rival test to the test laid out in British Eagle International.

–          Briggs J had felt that where the insolvent party had performed its end of the deal, the courts should be hesitant to deprive it of the consideration for its performance. Conversely, where the insolvent party has not provided its part of the bargain, then the courts would more readily uphold a clause that deprives it of property

THE RULE TODAY:

Belmont Park Investments Pty Ltd v. BNY Corporate Trustee Services Ltd1Belmont Park Investments Pty Ltd v. BNY Corporate Trustee Services Ltd [2011] UKSC 38

 

–          The Supreme Court rules on the anti-deprivation rule as it applies in insolvency law today.

–          The rule from British Eagle International was upheld, however with slight difference.

–          There are two parts of a general principle that parties cannot contract out of insolvency provided by legislation:

  • The pari passu rule (British Eagle International Airlines) is to the effect that the statutory provisions in bankruptcy for the pro rata distribution of the debtor’s assets may not be circumvented by an arrangement which gives one creditor more than his proper share by providing for one or more of his assets to be distributed in some other manner than the statutory scheme.
  • Contrasted to the anti-deprivation rule only applies if the deprivation is triggered by

Bankruptcy or liquidation , and has the effect of depriving the debtor of property which would otherwise be available to creditors.

–          The pari passu rule applies irrespective of solvency status.

 

Tags: , , , , ,

Category: Essay & Dissertation Samples, Law Essay Examples

Ask a question about this article

You must be logged in to post a comment.