Mayhew v King & Ors

The anti-deprivation principle may invalidate a contractual provision which removes an insolvent company’s asset upon the commencement of insolvency proceedings. The principle applies even where the asset is a contractual right to payment or an indemnity, and even where the provision formed part of the original bargain. An insolvency-triggered forfeiture is materially different from an ordinary time limit. A time limit may also be vulnerable where deliberately fixed to remove an asset from creditors in an impending insolvency.

Chaucer Insurance Plc, having indemnified Justin Mayhew and obtained an assignment from Milbank Trucks Limited’s administrators, sought declarations against Towergate Stafford Knight Company Limited under a settlement agreement between Milbank and Towergate. The agreement required Towergate to make payments to Milbank and indemnify it against liability to Mr Mayhew, but clause 11 terminated those obligations if Milbank entered administration before payment was due.

The issue was whether clause 11 offended the common-law anti-deprivation principle and was therefore ineffective, enabling Chaucer to enforce the assigned contractual rights.

1. The claim succeeded. Chaucer was entitled to the declarations and orders sought against Towergate, now Folgate London Market Limited.
2. The anti-deprivation principle is a common-law rule of public policy. It prevents an insolvent person from contracting for property subsisting at the commencement of insolvency to be dealt with otherwise than in accordance with insolvency legislation. It applies in an appropriate case to administration as well as liquidation and bankruptcy.
3. The payment and indemnity obligations in clause 4 were assets of Milbank which, absent clause 11, would have been available to its administrators for the benefit of creditors. Clause 11 did not merely impose a time limit. It removed those assets on the occurrence of Milbank’s insolvent administration and therefore engaged the principle.
4. An insolvency-triggered provision is not saved merely because it was part of the original bargain or because the asset was a contractual chose in action. The judge respectfully agreed with the relevant observations of Mr Justice Neuberger in Money Markets International Stockbrokers Limited v London Stock Exchange Limited, although those observations were obiter and the decision was not binding.
5. A nominal time limit may also be struck down where it was deliberately fixed to remove an asset from creditors in an impending insolvency administration.
6. The assignment by Milbank’s administrators carried the right to challenge clause 11 under the principle, and Chaucer could enforce the assigned rights.

First-instance decision in the High Court (Chancery Division). No appellate history is stated in the judgment.