Folgate London Market Ltd v Chaucer Insurance Plc

The anti-deprivation principle prevents parties from arranging that an asset belonging to an insolvent company ceases to be available to its creditors merely because insolvency occurs. The principle applies to a contractual debt or chose in action which is released on insolvency. A clause is not saved by describing the asset as inherently conditional or by linking the release to an alleged failure of continuing consideration, unless that is the genuine commercial purpose and operation of the clause. A provision which has the effect of removing an accrued asset from the insolvent estate, and which is in substance an attempt to avoid the consequences of insolvency legislation, is void.

Folgate, an insurance broker, agreed to indemnify Milbank Trucks Limited in respect of liabilities arising from a personal-injury claim. Clause 11 provided that Folgate’s indemnity obligation would end automatically if Milbank entered liquidation, administration, receivership or a voluntary arrangement before the payment date.

Milbank later entered administration. Its administrators assigned their interest in the settlement agreement to Chaucer, which had satisfied the injured claimant’s claim. The High Court held that clause 11 infringed the anti-deprivation principle: [2010] EWHC 1121 (Ch). Folgate appealed, arguing that clause 11 was either a valid time limitation or part of a flawed asset, and alternatively that it reflected the loss of Milbank’s continuing assistance under the agreement. The central issue was whether the clause validly released Folgate from an accrued payment obligation on Milbank’s insolvency.

1. Appeal dismissed. Clause 11 was void because it infringed the anti-deprivation principle.
2. The court rejected the suggested commercial link between clause 11 and Milbank’s obligation under clause 9.1 to provide assistance in defending the personal-injury claim. That obligation was collateral, of uncertain practical value, and was not expressed to release Folgate from payment if assistance was unavailable or not provided. Clause 11 operated on insolvency before the due date, including after Milbank’s assistance could no longer be required.
3. The distinction drawn in Lomas and Others v JFB Firth Rixson, Inc and Others between an accrued chose in action representing consideration for something already supplied and an ongoing right given in exchange for future performance could not assist Folgate on these facts. The clause 4 indemnity was an asset in the nature of a debt, and its release was triggered by Milbank’s insolvency rather than by failure of consideration.
4. The so-called flawed asset argument also failed. A contractual condition unrelated to insolvency may fall outside the principle, but a condition which removes a debt from the insolvent company’s assets upon insolvency is within it. Whitmore v Mason and Ex parte Mackay illustrated the rule. In Ex parte Mackay, an attempted preference arising on bankruptcy was void as an evasion of the bankruptcy laws. The present clause was an even clearer instance because it released the whole debt.
5. The principle rests on public policy against contracting out of insolvency legislation. The majority reasoning in British Eagle International Airlines Ltd v Compagnie Nationale Air France confirmed the correctness of Ex parte Mackay. Clause 11 was therefore void, and Chaucer was entitled to pursue the indemnity assigned to it.

• Court of Appeal (Civil Division): appeal from the order of Sir Edward Evans-Lombe, sitting as a High Court Judge in the Chancery Division, dated 20 May 2010. The appeal was dismissed: [2010] EWHC 1121 (Ch).