Court of Appeal
Published November 16, 2009
Perpetual Trustee Co Ltd and Another v BNY Corporate Trustee Services Ltd
and Another
Butters and Others v BBC Worldwide Ltd and Others
Before Lord Neuberger of Abbotsbury, Master of the Rolls, Lord Justice
Longmore and Lord Justice Patten
Judgment November 6, 2009
Complex contractual provisions granting investors rights over assets derived
from their own moneys, rights which were modified when a default event
triggering insolvency occurred, were not caught by the antideprivation rule,
which prevented parties from contracting out of the insolvency legislation
by removing assets which would otherwise be available for creditors.
Similarly, the rule did not apply to licence termination and share option
provisions operative on insolvency which did not contravene the Insolvency
Act 1986.
Transactions which amounted to a deprivation for the purposes of the rule, but
which were completed before the liquidation or insolvency occurred, did not
normally come within the rule.
The Court of Appeal so held, when:
(i) dismissing an appeal by the second defendant, Lehman Brothers Special
Financing Inc, against the decision of Sir Andrew Morritt, Chancellor
([2009] EWHC 1912 (Ch)) in favour of the claimants, Perpetual Trustee Co Ltd
and Belmont Park Investments Pty Ltd, that certain contractual provisions
which, on an insolvency event, switched the priority over assets and changed
the allocation of specific costs to the potential detriment of Lehman BSF,
were valid because the antideprivation rule did not apply to them;
(ii) dismissing the appeal of Daniel Butters, Neville Kahn and Nicholas
Dargan, joint administrators of WW Realisation 8 Ltd, formerly Woolworths
Media plc, and of Woolworths Group plc, against the decision of Mr Justice
Peter Smith ([2009] EWHC 1954 (Ch)) that the licence termination and share
option provisions were enforceable after deletion of those parts which
offended the antideprivation rule;
(iii) dismissing an appeal by the third defendant, BBC Video Ltd, and the
administrators against the finding that as a result of the parties' conduct
the master licence agreement determined; and (iv) allowing the cross-appeal
of the first defendant, BBC Worldwide Ltd, against the finding that the
licence termination and share option provisions as drafted were caught by
the anti-deprivation rule.
Mr Richard Snowden, QC and Mr James Potts for Lehman BSF; Mr
Gabriel Moss, QC and Mr David Allison for Perpetual; Mr
Richard Salter, QC and Mr Jonathan Davies-Jones for Belmont; Mr
Stephen Midwinter for BNY Corporate Trustee Services Ltd.
Mr Richard Sheldon, QC and Mr Barry Isaacs for the Woolworth
administrators; Mr Mark Howard, QC, Mr Daniel Jowell and Mr Mark
Arnold for BBC Worldwide; Mr Edmund Cullen for BBC Video.
THE MASTER OF THE ROLLS said that in the Lehman appeal those administering the
estate of Lehman BSF, submitted that the Chancellor wrongly held that the
antideprivation rule did not apply to assets in the form of synthetic
collateralised debt obligations, set up through a special purpose vehicle,
so as to invalidate provisions which, on an insolvency event: (a) switched
the priority over the assets in the special purpose vehicle between the
credit default swap counterparty, Lehman BSF and the claimant noteholders,
Perpetual and Belmont, in favour of the noteholders, and (b) changed the
allocation of the “unwind costs” in the noteholders' favour to the potential
disadvantage of Lehman BSF.
The Chancellor’s reasons were: first, that the disadvantage to Lehman BSF fell
outside the rule, and secondly, the provisions were operated before Lehman
BSF filed for Chapter 11 protection in the United States, the equivalent of
a winding-up order.
The anti-deprivation rule was founded on public policy but only to the extent
that it precluded contracting out of the insolvency legislation: see British
Eagle International Airlines Ltd v Cie National Air France ([1975] 1 WLR
758), Carreras Ltd v Freeman Matthews Ltd ([1985] 1 Ch 208) and IATA
v Ansett Australia Holdings Ltd ([2008] BPIR 57).
The question arose of whether the “flips” from swap counterparty priority to
noteholder priority and from one contractual condition to another
constituted deprivations potentially precluded by the rule. The flip
reversed the order of priority over a company as the holder of a charge, in
favour of another chargee over the same assets.
The flip provisions did not to divest Lehman BSF of assets currently vested in
it and to reinvest them in the noteholders, but simply changed the order of
priorities for the exercise of the rights in relation to the proceeds of
sale of the collateral on a default event.
In effect the noteholders granted to Lehman BSF rights over assets derived
from their moneys, rights liable to be modified on the happening of a
default event. That was a valid arrangement even on or after Lehman BSF had
filed for Chapter 11.
Lord Justice Patten had reached the same conclusion on the simple basis that
the flip could not be caught by the rule, even if it operated after the
company went into liquidation, at least if that reversal was an original
feature of the company’s charge when it was granted.
His Lordship sympathised with that view but based his conclusion on the more
limited ground. The simple analysis could, considering the limited
circumstances in which a transaction would be held to be a sham, make it
very easy to dress up sale transactions to enable the rule to be
circumvented.
Even if the flips had come within the rule, the rule would not have been
engaged, because the triggering event was the filing for Chapter 11 of
Lehman Bros Holdings Inc, 18 days before Lehman BSF filed for Chapter 11.
The deprivation occurred before, not on or after the liquidation or its
equivalent.
A contractual agreement which deprived a company of an asset before it went
into liquidation was not inconsistent with the Insolvency Act 1986, unless
it fell within sections 238 or 239 which did not apply in this case.
To avoid uncertainty, the court should adhere to the simple proposition that,
if the deprivation occurred before the winding-up, it did not fall within
the rule whereas if it occurred after the winding-up, it did.
In relation to the Woolworths appeal, the main issues were whether certain
licence termination and share option provisions which arose on insolvency
could infringe the rule.
Fundamentally, the licence clause did not infringe the rule because its
invocation did not involve what had been the property of the insolvent party
becoming vested in a third party. It merely involved a limited interest
being brought to an end, according to its terms, by the third party who had
granted it to the party who had become insolvent.
The share option provision, by contrast, did involve property owned by the
party who had become insolvent. That clause would fall foul of the rule but
for one important feature. It was the market price that was payable under
the clause, which could not be objectionable.
If those clauses were each on its own unexceptionable, it was difficult to see
how they could be objectionable because they existed together. The judge
wrongly held that the rule was engaged. His blue pencil exercise resulted in
the two clauses having the same commercial effect as they had without the
excision.
Even if the rule had been engaged, it would have had no application because
the relevant insolvency event occurred before the administration order in
question was made. Both principle and practicality supported the view that
the rule did not apply where the deprivation had been effected by the time
the winding-up, or administration order was made against the company which
was deprived.
Lord Justice Longmore delivered a concurring judgment. Lord Justice Patten
delivered a judgment concurring in the result.
Solicitors: Weil, Gotshal & Manges; Sidney Austin LLP; Lawrence Graham
LLP; Lovells LLP.
Denton Wilde Sapte LLP; Olswang LLP; Wiggin LLP.
