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Belmont Park Investments PTY Limited v BNY Corporate Trustee Services Limited and Lehman Brothers Special Financing Inc

before

Lord Phillips, President
Lord Hope, Deputy President
Lord Walker
Lady Hale
Lord Mance
Lord Collins
Lord Clarke

JUDGMENT GIVEN ON

27 July 2011

Heard on 1, 2 and 3 March 2011

Appellant Richard Snowden QC James Potts (Instructed by Weil, Gotshal & Manges)	1st to 29th Respondents Richard Salter QC Jonathan Davies-Jones (Instructed by Lawrence Graham LLP)
(30th Respondent) Mark Howard QC Stephen Midwinter (Instructed by Hogan Lovells International LLP)	Intervener (The Commissioners for Her Majesty’s Revenue & Customs) Gregory Mitchell QC (Instructed by HMRC Solicitors Office)
Intervener (The Football Association Premier League Limited) Gabriel Moss QC Daniel Bayfield (Instructed by McCormicks Solicitors)

LORD COLLINS

I Introduction: the anti-deprivation rule and the pari passu principle

1. The anti-deprivation rule and the rule that it is contrary to public policy to contract out of pari passu distribution are two sub-rules of the general principle that parties cannot contract out of the insolvency legislation. Although there is some overlap, they are aimed at different mischiefs: Goode “Perpetual Trustee and Flip Clauses in Swap Transactions” (2011) 127 LQR 1, 3-4. The anti-deprivation rule is aimed at attempts to withdraw an asset on bankruptcy or liquidation or administration, thereby reducing the value of the insolvent estate to the detriment of creditors. The pari passu rule reflects the principle that statutory provisions for pro rata distribution may not be excluded by a contract which gives one creditor more than its proper share.

The anti-deprivation rule

2. What is now described as the anti-deprivation principle dates from the 18^th century, although the expression “deprivation” has been in use in this context only since the decision of Neuberger J in Money Markets International Stockbrokers Ltd v London Stock Exchange Ltd [2002] 1 WLR 1150. In 1812 Lord Eldon LC confirmed that a term which is “adopted with the express object of taking the case out of reach of the Bankrupt Laws” is “a direct fraud upon the Bankrupt Laws” from which a party cannot benefit: Higinbotham v Holme (1812) 19 Ves Jun 88, 92.

3. Classic statements of the principle include these:

“… the law is too clearly settled to admit of a shadow of doubt that no person possessed of property can reserve that property to himself until he shall become bankrupt, and then provide that, in the event of his becoming bankrupt, it shall pass to another and not to his creditors.” (Whitmore v Mason (1861) 2 J & H 204, 212, per Sir William Page Wood V-C)

“… a simple stipulation that, upon a man’s becoming bankrupt, that which was his property up to the date of the bankruptcy should go over to some one else and be taken away from his creditors, is void

as being a violation of the policy of the bankrupt law” (Ex p Jay; In re Harrison (1880) 14 Ch D 19, 25, per James LJ).

4. In the case of personal bankruptcy, section 306(1) of the Insolvency Act 1986 Act (“the 1986 Act”) provides that a bankrupt’s estate vests in the trustee in bankruptcy immediately upon his appointment and section 283(1) provides that a bankrupt’s estate comprises “all property belonging to or vested in the bankrupt at the commencement of the bankruptcy; and…any property which by virtue of any of the following provisions of this Part is comprised in that estate or is treated as falling within the preceding paragraph.”

5. In the case of corporate insolvency, the insolvent company continues to be owner of its property but holds it on trust for the creditors in accordance with the provisions of the 1986 Act: Ayerst v C & K (Construction) Ltd [1976] AC 167. For companies, section 436 defines “Property” so that it:

“includes money, goods, things in action, land and every description of property…and also obligations and every description of interest, whether present or future or vested or contingent, arising out of, or incidental to, property”

The pari passu principle

6. In the case of personal bankruptcy, by section 328 of the 1986 Act, subject to preferential payments, and with the exception of certain deferred debts, all other debts are to be paid equally. For companies, section 107 provides that, subject to the provisions relating to preferential payments, “the company’s property in a voluntary winding up [should] on the winding up be applied in satisfaction of the company’s liabilities pari passu”. By rule 4.181 of the Insolvency Rules 1986 (SI 1986/1925) similar provision is made for a winding up by the court. In such a winding up, the liquidator must “secure that the assets of the company are got in, realised and distributed to the company’s creditors” and, subject to that, he must “take into his custody or under his control all the property and things in action to which the company is … entitled” (sections 143 and 144 of the 1986 Act).

7. In British Eagle International Airlines Ltd v Cie Nationale Air France [1975] 1 WLR 758 the House of Lords by a bare majority (reversing Templeman J and a unanimous Court of Appeal [1974] 1 Lloyd’s Rep 429, with Russell LJ delivering the judgment of the court) decided that a clearing house arrangement between a large number of airline companies relating to debts arising as between them was ineffective as against the liquidator of one of the companies, British

Eagle. All members of the House upheld the principle that contracting out of the pari passu provisions of what was then section 302 of the Companies Act 1948 was contrary to public policy and void. The difference between the majority and minority related largely (but not exclusively) to the question whether the arrangement resulted in no debt being due. The conclusion of the majority in the House of Lords was that, insofar as the arrangement purported to apply to debts which existed when the members of the company passed the resolution to go into creditors’ voluntary liquidation, it would have amounted to contracting out of the statutory requirement that the assets owned by the company at the date of its liquidation should be available to its liquidator, who should use them to meet the company’s unsecured liabilities pari passu, under what is now section 107 of the 1986 Act.

8. The ratio of the decision was accurately stated by Peter Gibson J in Carreras Rothmans Ltd v Freeman Mathews Treasure Ltd [1985] Ch 207, 226, as being that “where the effect of a contract is that an asset which is actually owned by a company at the commencement of its liquidation would be dealt with in a way other than in accordance with [the statutory pari passu rule] … then to that extent the contract as a matter of public policy is avoided.”

9. The distinction between the two sub-rules is by no means clear-cut. Several decisions which are regarded as decisions on the anti-deprivation rule could also be characterised as cases in which the parties sought to disturb pari passu distribution. Ex p Mackay; Ex p Brown; In re Jeavons (1873) LR 8 Ch App 643 is usually regarded as an anti-deprivation case. It involved two transactions: the first was the sale of a patent for improvements in the manufacture of armour plates by Mr Jeavons to Brown & Co and Cammell & Co in consideration of the companies paying royalties; the second was a secured loan of £12,500 from the companies to Mr Jeavons. The parties agreed that (1) the companies would keep half the royalties towards satisfying the debt, and (2) in the event of Mr Jeavons’ bankruptcy, they could also keep the other half of the royalties until the debt had been fully paid. It was held that provision (1) was valid against Mr Jeavons’ trustee, but provision (2) was not.

10. James LJ said (at p 647) that provision (1) represented “a good charge upon one moiety of the royalties, because they are part of the property and effects of the bankrupt”, but provision (2) “is a clear attempt to evade the operation of the bankruptcy laws” as it “provide[d] for a different distribution of his effects in the event of bankruptcy from that which the law provides”. Mellish LJ said (citing Higginbotham v Holme 19 Ves Jun 88, 92) that the case fell within the principle that:

“… a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws …” (p 648)