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The Supreme Court recently considered the scope of the
anti-deprivation principle, in Belmont Park Investments PTY
Limited (respondent) v. BNY Corporate Trustee Services Limited and
Lehman Brothers Special Financing Inc (appellant)  UKSC 38
(Belmont). Understanding the scope of this principle is
important for anyone entering a contract where the parties’ rights
and obligations change if one of them enters an insolvency
procedure. Robert Spedding
explains how the courts applied the principle in Belmont and makes
some practical suggestions for avoiding problems.
The term “anti-deprivation principle” is relatively recent, but
the principle itself is well established at common law. The
principle is essentially that a contractual term will be void which
provides that one party must hand over one or more of its assets to
another party if, and only if, the first party enters an insolvency
procedure. For example, the English courts have found that the
principle made invalid a clause in an agreement providing that
party A’s obligation to compensate party B for a particular loss
would automatically terminate if party B entered insolvency
proceedings. The rule’s purpose is to ensure that a person’s assets
are available to its creditors generally on its insolvency.
Lehman Brothers set up a special purpose vehicle (the Issuer)
which borrowed money by issuing notes. It also entered into a
credit default swap with a Lehman Brothers entity (LBSF) in respect
of its obligations under the notes. The Issuer granted security
over certain “collateral” for its obligations to both noteholders
and LBSF. Under the terms of the transaction documents (which were
governed by English law), priority in relation to the proceeds of
the collateral switched from LBSF to the noteholders on the
occurrence of an event of default. One event of default was the
insolvency of LBSF, which occurred when it went into Chapter 11
protection in the US. LBSF’s case was that this “flip” clause
breached the anti-deprivation principle because it unlawfully
denied its creditors access to the proceeds of the collateral
solely because LBSF went into Chapter 11.
The High Court, the Court of Appeal and the Supreme Court all
agreed that the contractual change in priority was effective under
English law. The Supreme Court gave various reasons for its
But perhaps the key point made by the Supreme Court was a more
general one: the parties made the contract in good faith and
without intending to evade insolvency laws. The Court noted that
any event of default would have triggered the "flip" term; it was
not a term that would only become relevant on LBSF's entry into an
insolvency procedure. On that basis, the principle did not
invalidate the term changing the creditors’ respective priorities.
The Supreme Court therefore gave a narrow interpretation of the
anti-deprivation principle, concluding that “it is desirable that,
so far as possible, the courts give effect to contractual terms
which parties have agreed”.
Following Belmont, parties entering an English law
contract can be more confident that the anti-deprivation principle
will not invalidate the terms they are agreeing. However, they
should still bear the following points in mind:
For more information, please contact
email@example.com or your usual SNR Denton
Law stated as at 17 November
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