Perpetual Trustee Co Ltd v BNY Corporate Trustee Services Ltd (Court of Appeal)

The Court of Appeal considered the scope and application of the anti-deprivation rule to two separate sets of commercial arrangements: (a) complex synthetic collateralised debt obligation documentation involving a swap counterparty (LBSF), an issuer/SPV and Noteholders, and (b) a joint venture and licensing structure between BBCW, Media, 2e and Video. The principal legal questions were whether contractual provisions that (i) reverse the priority between competing chargees on an insolvency event (the so-called "flip" provisions) and (ii) enable termination of licences and compulsory acquisition of shares on an insolvency event offend the anti-deprivation rule.

The court held that the anti-deprivation rule is essentially an adjunct of the statutory insolvency regime and is concerned with preventing contractual arrangements that remove assets from a bankrupt or liquidating estate in a manner inconsistent with the Insolvency Act 1986 and its pari passu principle. Applying that principle, the court concluded that:

• The "flip" provisions in the Perpetual documentation did not offend the rule because they merely changed the order of priority under securities over collateral that had been acquired largely with Noteholders' subscription monies; LBSF never had an unfettered proprietary interest in assets purchased with those monies and the priority reversal was an original contingent feature of the security arrangement.
• Even if the flips could be characterised as a deprivation, they operated on the filing by LBHI before LBSF's Chapter 11 filing, and the court treated a deprivation effected prior to the onset of formal insolvency as normally outside the scope of the rule.
• In the Butters (Woolworths) litigation, termination of the Master Licence on the insolvency of an associated company, and the linked right for BBCW to acquire Media's shares at market ("Fair Value") did not contravene the anti-deprivation rule. A licensor's contractual right to terminate a licence on insolvency and a contemporaneous market-value purchase of shares do not, objectively, remove property from the insolvent estate in a manner prohibited by the statute.

The Court therefore dismissed the Lehman (Perpetual) appellant's appeal against the Chancellor, dismissed the administrators' appeals in the Butters appeal, dismissed BBC Video's appeal, and allowed BBCW's cross-appeal in relation to the licence dispute. The court also upheld the High Court's finding that a temporary licence supplanted the prior MLA on the factual findings made.

This dispute involved multiple related appeals concerned with the anti-deprivation rule. The Perpetual appeal related to synthetic collateralised debt obligations: an issuer (SPV) issued Notes funded by Noteholders whose subscriptions bought collateral; a Lehman entity (LBSF) acted as swap counterparty; security over the collateral contained "flip" provisions that switched priority from the swap counterparty to the Noteholders on defined Events of Default (including Chapter 11 filings). The Chancellor had held the rule did not prevent Noteholders invoking Noteholder Priority and Condition 44.2; LBSF appealed arguing those provisions deprived its creditors of assets on insolvency and were void.

The Butters appeal concerned a joint venture agreement (JVA) and a Master Licence Agreement (MLA) between BBCW, Media, 2e and Video. Clause 26.7 of the JVA allowed BBCW to require Media to sell its 40% shares in 2e at "Fair Value" on an Insolvency Event; clause 16.2.5 of the MLA provided the MLA terminated if BBCW exercised that right. Administrators contended these linked provisions offended the anti-deprivation rule; BBCW contended the Judge was wrong and asserted, alternatively, that the MLA had in any event been displaced by a temporary licence.

Issues framed by the court:

• What is the proper scope and legal basis of the anti-deprivation rule in light of the Insolvency Act 1986 and relevant authorities (notably British Eagle)?
• Whether the "flip" provisions and Condition 44 in the Perpetual documentation effected a deprivation of property caught by the rule.
• Whether clauses 26.7 (JVA) and 16.2.5 (MLA), or their linkage, offended the rule in the Butters appeal.
• Whether a temporary licence granted in February 2009 had the effect of terminating the MLA irrespective of the validity of BBCW's termination notice.

Reasoning and conclusions:

• The Court adopted the orthodox view that the anti-deprivation rule must be read as enforcing the statutory insolvency regime: it prevents contractual arrangements that remove a company's property from the estate on insolvency in a way inconsistent with the Insolvency Act's pari passu distribution. British Eagle remains the leading authority on that proposition.
• On the Perpetual facts the Court emphasised the economic substance: collateral had been acquired with Noteholders' money; LBSF's priority was always contingent and part of the security's terms. The "flip" changed priorities among secured rights; it did not transfer property already vested in LBSF to Noteholders. The Court therefore held no offending deprivation occurred. Even if there were a deprivation, the operative triggering event (LBHI's Chapter 11 filing) preceded LBSF's Chapter 11 filing so, as a matter of principle and practicality, the anti-deprivation rule was not engaged because the purported deprivation was completed prior to the formal insolvency.
• On the Butters facts the Court held licence termination clauses and linked share acquisition at market value do not, of themselves, offend the rule; a licensor may contract for termination on insolvency and a purchase at market value does not operate to transfer an asset from the estate at an undervalue. The linkage between the JVA and MLA did not convert valid provisions into invalid ones.
• The Court also upheld the High Court's factual finding that the parties entered a temporary licence which supplanted the MLA (and so the administrators could not rely on any remaining rights under the MLA in respect of exploitation after February 2009).

The court noted the need for caution in expanding the rule beyond established limits and observed that Parliament has enacted targeted anti-avoidance provisions (ss.238, 239 etc) where it intended a wider reach.

The Court of Appeal dismissed the appeal of Lehman Brothers Special Financing Inc (LBSF) and the administrators' appeals in the Woolworths (Butters) litigation, dismissed BBC Video's appeal, and allowed BBC Worldwide's cross-appeal. Rationale: the anti-deprivation rule is confined to protecting the statutory insolvency regime; the "flip" priority provisions merely altered contingent priorities over collateral acquired with Noteholders' funds and did not remove vested property from the insolvency estate, and the licence/share purchase provisions in the JVA/MLA, including their linkage, did not operate to transfer Media's assets at an undervalue or otherwise offend the rule; a temporary licence also supplanted the MLA on the Judge's findings.

Appeals from the High Court of Justice, Chancery Division: (i) Chancellor (Sir Andrew Morritt) judgment in the Lehman matters, reported as [2009] EWHC 1912 (Ch); (ii) Peter Smith J judgment in the Woolworths/Butters proceedings, reported as [2009] EWHC 1954 (Ch). The judgments were brought to the Court of Appeal (Cases Nos A3/2009/1794, 2037, 2043, 2047) and determined by the EWCA (Civil) on 6 November 2009 (Neutral Citation [2009] EWCA Civ 1160).