Squires & Ors v AIG Europe (UK) Ltd & Anor

A contractual subordination arrangement made while companies are solvent remains enforceable when insolvency occurs. A liquidator cannot disclaim it merely because it disadvantages creditors, unless continuing obligations prejudice the realisation and distribution of the company’s property. An inter-company proof restriction forming part of a multilateral arrangement cannot be waived unilaterally by the principal creditor. In an insolvent administration, the equitable rule in Cherry v Boultbee continues to operate where statutory mutual set-off is unavailable. A principal debtor seeking a distribution must contribute the full amount of the surety’s liability, not merely the dividend expected from that liability.

The appeals arose from conjoined applications in the liquidations of Save Group Plc and its subsidiary, SSSL Realisations (2002) Limited. AIG had provided customs duty bonds and held an indemnity deed containing subordination, trust and payment provisions.

Mr Justice Lloyd held that the deed prevented Group from proving in Stations’ liquidation, could not be disclaimed as onerous property, and did not create a registrable charge. The liquidators appealed from that order, raising questions concerning disclaimer, unilateral waiver, equitable contribution, double proof, trust obligations and registration under the Companies Act 1985.

Chadwick LJ gave the leading judgment. Jonathan Parker LJ and Etherton J agreed.

1. Disclaimer. The deed was not an unprofitable contract within section 178(3)(a) of the Insolvency Act 1986. The relevant inquiry concerns future obligations whose performance may prejudice the liquidator’s duty to realise property and pay a dividend within a reasonable time. Mere financial disadvantage, or the fact that a better bargain might have been made, is insufficient. The deed had already produced its reciprocal benefit and the restriction on proof did not impose prospective liabilities, continuing expenditure or performance over a substantial period. The liquidators therefore could not disclaim it.
2. Subordination. Clause 8.2(b) imposed a multilateral obligation on the indemnitors. It protected AIG and the group companies from competing inter-company proofs. AIG could not waive the restriction unilaterally. The restriction could be waived only by the mutual agreement of the relevant parties. Subordination agreements of this nature should, where necessary, be enforced when insolvency occurs, including by injunction.
3. Equitable contribution. The rule in Cherry v Boultbee applies in the distribution of an insolvent fund where statutory mutual set-off is unavailable, including because of the rule against double proof. A claimant who is also bound to indemnify the fund must bring the contribution into account before sharing. Where the fund is surety for the claimant’s debt, the contribution is the full amount of the surety’s liability, even if the liability has not yet been paid. The rule protects the surety estate’s creditors and does not create an impermissible second proof.
4. On the figures, Group’s required contribution would exceed the dividend on its proof, so it would receive nothing in Stations’ liquidation in any event. The court also held, as an alternative matter, that clause 8.3 limited the trust and payment obligations to sums necessary to discharge AIG’s debt and did not create a charge. The appeal was dismissed.

• Court of Appeal (Civil Division) dismissed the appeal and refused the further direction sought by the liquidators: [2006] EWCA Civ 7.
• High Court, Chancery Division, Companies Court held that the indemnity deed prevented Group from proving in Stations’ liquidation, could not be disclaimed, and did not create a registrable charge: [2004] EWHC (Ch) 1760; [2005] 1 BCLC 1.