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Court of Appeal backs Chaucer in insolvency principle dispute

31 March 2011
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 todays 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, Milbanks 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 Milbanks right to indemnity would cease should it become insolvent.

Milbank subsequently fell into administration and the administrators assigned all of Milbanks 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 Milbanks 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 Courts 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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