Folgate London Market Limited v Chaucer Insurance Plc

The Court of Appeal dismissed Folgate's appeal and held that clause 11 of the 25 August 2006 settlement agreement was void because it offended the anti-deprivation principle. The court treated Folgate's clause 4 indemnity as an asset of Milbank which, absent clause 11, would have been available to Milbank's administrators and creditors. Clause 11 operated to extinguish that asset upon Milbank's insolvency and thus sought to alter the statutory distribution of the insolvent's property.

The court rejected Folgate's arguments that the clause was merely a permissible time limit or a legitimate contractual qualification of a "chose in action" (the "flawed asset" argument), and also rejected a late argument that clause 11 was commercially linked to Milbank's collateral obligation to provide assistance under clauses 5 and 9.1. Authorities relied on included Ex parte Mackay and British Eagle, which the court applied to find clause 11 void as a collateral device to evade insolvency legislation.

Background and parties:

• Folgate London Market Limited (formerly Towergate Stafford Knight Company Limited) (appellant) was a broker who entered a settlement agreement with Milbank Trucks Limited. Chaucer Insurance Plc (respondent), as Milbank's insurer and later assignee of Milbank's rights, sought enforcement of Milbank's indemnity under that agreement.

Nature of the claim and procedural posture:

• Chaucer, having been joined in underlying personal injury proceedings under section 151 of the Road Traffic Act 1988, obtained an assignment from Milbank's administrators of Milbank's rights under the settlement. Chaucer commenced a Part 20 claim to enforce the indemnity provisions of the settlement agreement. Folgate relied on clause 11 of the agreement which provided that if Milbank entered insolvency (liquidation, administration, receiver appointed or a voluntary arrangement proposed under Part 1 of the Insolvency Act 1986) prior to Folgate's Due Date for Payment, Milbank's right to an indemnity would cease and Folgate would be released from further obligations.
• The High Court (Sir Edward Evans-Lombe) held clause 11 void for infringing the anti-deprivation principle. Folgate appealed to the Court of Appeal.

Issues framed by the court:

1. Whether clause 11 offended the anti-deprivation principle by removing from Milbank (and hence its creditors) an asset that would otherwise have been available on insolvency.
2. Whether the asset was a "flawed" chose in action intrinsically subject to the clause 11 limitation so that no deprivation occurred.
3. Whether clause 11 could be commercially justified as linked to Milbank's collateral obligation (clauses 5 and 9.1) to provide assistance in the defence of the underlying claim, and thus be a permissible termination of an ongoing contractual relationship when insolvency intervened (as discussed in Lomas).

Court's reasoning and conclusion:

• The Court of Appeal agreed with the judge that the clause 4 indemnity was an asset of Milbank which, absent clause 11, would have been available to administrators for creditors. Clause 11 extinguished that asset upon Milbank's insolvency and thereby contravened the anti-deprivation principle as exemplified in Ex parte Mackay and British Eagle.
• The court rejected the time-limit/time-event distinction as a way to evade the principle and dismissed the "flawed asset" argument because the disqualifying condition was Milbank's insolvency itself. The late argument that clause 11 was linked to clause 9.1 (the assistance obligation) was found speculative and implausible on the facts: clause 9.1 was a minor collateral obligation and clause 11 operated even after the assistance would have been fully performed.
• The Court therefore dismissed the appeal and confirmed that clause 11 was void for being an attempt to contract out of the Insolvency Act 1986 distribution rules.

Appeal dismissed. The court held that clause 11, which released Folgate from its payment and indemnity obligations on the occurrence of Milbank's insolvency, infringed the anti-deprivation principle. The clause operated to extinguish an asset of Milbank upon insolvency and thus amounted to an impermissible attempt to alter the distribution of the insolvent's property; alternative arguments (time-limit distinction, "flawed asset" and linkage to clause 9.1 assistance) were rejected.

Appeal from the High Court of Justice, Chancery Division (Sir Edward Evans-Lombe), [2010] EWHC 1121 (Ch).