Perpetual Trustee Company Ltd & Anor v BNY Corporate Trustee Services Ltd & Ors

The anti-deprivation rule prevents contractual arrangements from removing a company’s property from the statutory insolvency regime or distributing it otherwise than as insolvency legislation requires. It does not invalidate a right which has been fully exercised before the affected company enters liquidation, administration or its equivalent, unless the transaction is a sham.

A contractual reversal of priorities under a security arrangement is valid where the charged rights were always contingent on that reversal and it does not transfer an asset of the insolvent company. A licence may validly determine on insolvency. An option to acquire shares on insolvency is also valid where it requires payment of at least market value. These conclusions follow from the proper application of the Insolvency Act 1986, not from a free-standing rule against contractual economic disadvantage to an insolvent estate.

These conjoined appeals concerned the anti-deprivation rule. In the Lehman appeal, the court considered synthetic collateralised debt obligations under which the priority of the swap counterparty and Noteholders changed after an event of default. The Chancellor had held that the priority and unwind-cost provisions were valid: [2009] EWHC 1912 (Ch).

In the Woolworths appeal, BBC Worldwide served notice to acquire Media’s shares in a joint-venture company at Fair Value and to terminate the licence held by the joint venture’s subsidiary. Peter Smith J held that the linked provisions infringed the rule but could be modified, and that a later temporary licence independently ended the original licence: [2009] EWHC 1954 (Ch).

The central issue was whether these provisions improperly deprived the insolvent companies’ estates of property.

1. The appeals by LBSF, the administrators and BBC Video were dismissed. BBC Worldwide’s cross-appeal was allowed. The anti-deprivation rule is a rule of public policy only insofar as it prevents contracting out of the statutory insolvency regime. It applies where property of the insolvent company is dealt with inconsistently with that regime, particularly the pari passu distribution required by the Insolvency Act 1986.

2. The Lehman priority “flips” did not deprive LBSF of an asset. LBSF’s security rights over collateral had always been contingent on an event of default. The collateral was principally acquired with the Noteholders’ money, and the provisions merely restored the Noteholders’ priority to recover their subscriptions and interest before LBSF recovered from the collateral. The provisions did not give the Noteholders a new asset or more than that contractual protection.

3. Further, the relevant trigger was LBHI’s Chapter 11 filing, which occurred before LBSF’s Chapter 11 filing. A deprivation completed before the affected company enters liquidation, administration, bankruptcy or an accepted equivalent is outside the rule, absent a sham. Insolvency before the formal process, or the insolvency of another group company, does not itself engage the rule. The contrary view in Fraser v Oystertech plc was overruled to that extent.

4. The Woolworths licence provision validly determined a limited interest granted by BBC Worldwide. It did not transfer Media’s property to BBC Worldwide. The share-purchase provision was also valid because it required Fair Value, at least market value, for Media’s shares. Linking the licence termination to the share acquisition did not make either otherwise valid provision objectionable. The notice was in any event served before Media entered administration.

5. Longmore LJ additionally held that the temporary licence supplanted the original Master Licence. The parties knew that the original termination could be challenged, but agreed a new arrangement without making its validity conditional on the old licence having ended. That conclusion was unnecessary to the disposition.

• Court of Appeal (Civil Division): Dismissed LBSF’s appeal, the administrators’ appeals and BBC Video’s appeal; allowed BBC Worldwide’s cross-appeal: [2009] EWCA Civ 1160 .

• High Court, Chancery Division (Chancellor): Held that the Lehman priority and unwind-cost provisions did not infringe the anti-deprivation rule: [2009] EWHC 1912 (Ch) .

• High Court, Chancery Division (Peter Smith J): Held that the Woolworths provisions infringed the rule but modified them, and held that the temporary licence ended the original licence: [2009] EWHC 1954 (Ch) .