insolvency principle dispute
Court of Appeal backs Chaucer
30 March 2011
The long standing uncertainty surrounding the application of the
anti-deprivation principle has once again been thrown into the
limelight with today’s Court of Appeal judgment in the case of
Folgate London Market Limited v Chaucer Insurance Plc.
The anti-deprivation principle seeks to prevent a company from
depriving its creditors of assets in the event of insolvency.
The court had to consider whether a clause in a settlement
agreement fell foul of the principle and was therefore void.
In the original case, Mr Mayhew suffered serious personal injury
as a result of a car accident involving a crane owned by Milbank
Trucks Limited and subsequently sought damages from Milbank.
Chaucer Insurance Plc, Milbank’s insurer, refused to provide
indemnity for the claim under the policy and as a result, Milbank
commenced proceedings against their broker Folgate for negligently
selling the insurance policy with Chaucer.
Milbank and Folgate agreed a settlement in which Folgate would
indemnify Milbank against the claim, however, the settlement
included a clause (clause 11) which meant Milbank’s right to
indemnity would cease should it become insolvent.
Milbank subsequently fell into administration and the
administrators assigned all of Milbank’s rights under the agreement
to Chaucer who sought to enforce the indemnity. Folgate refused,
arguing that the termination clause released it from any liability
as it merely served to impose a time limit on the indemnity, albeit
the time limit was determined by reference to an event (namely the
insolvency). There was, it was said, no reason to treat such a
limit differently from a specific time limit. However, Chaucer
maintained that the termination clause was invalid as it was
contrary to the anti-deprivation principle. The High Court
agreed.
The Judge held that there was an essential difference between a
simple time limit and a limitation by reference to an insolvency
event and that an asset limited to a time period which would lead
the court to believe that the period had been fixed deliberately to
remove the asset from the creditors upon insolvency, may too offend
the principle.
In the Court of Appeal, Folgate argued that the principle did
not apply as the contractual right, which the clause took away from
Milbank, was dependent on continued performance of obligations by
Milbank to co-operate with the defence of the litigation brought by
Mr Mayhew. Folgate argued that Milbank’s insolvency would prevent
it from complying with those obligations and it was therefore
legitimate to deprive Milbank of its right to payment in the event
of its insolvency.
The Court of Appeal upheld the High Court’s decision that clause
11 could not be used by Folgate to invalidate the agreement as it
offends the anti-deprivation principle, ruling that cooperation
relating to the litigation “is a minor collateral obligation,
likely in practice to be of little commercial value. There is no
evidence before us that it was of any value at all. The big guns of
clause 11 were not deployed to deal with any contemplated breach of
it”.
This judgment demonstrates the ongoing relevance of the
anti-deprivation principle and the profound effects that this can
have on commercial contracts. Further guidance on the principle can
be expected to come from the Supreme Court when the Judgment in
Belmont is handed down.
Paul Cox (instructing Antony Zacaroli QC of 3-4
South Square) acted for Chaucer before the Judge and on
appeal.
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