A recent decision by the Supreme Court of the United Kingdom (Belmont Park Investments v BNY Corporate Trustee and Lehman Brothers Special Financing (2011) UKSC 38) has ended considerable conjecture by signifying that the nineteenth century anti-deprivation rule remains pertinent despite modern insolvency legislation.
The anti-deprivation rule prevents a bankrupt from transferring assets out of their estate to defeat creditors. The rule was summarised in Ex parte Jay; Re Harrison (1880) 14 Ch D 19:
“There cannot be a valid contract that a man’s property shall remain his
until bankruptcy and on the happening of that event shall
go over to someone else and be taken away from his creditors.”
The Bankruptcy Act contains exhaustive legislative provisions aimed at stopping debtors transferring property out of their name to avoid losing that property on bankruptcy.
The decision serves to remind us that black letter law is not always all we have to rely on and that the common law supplements or extends the legislative principles.
“The anti-deprivation rule is too well-established to be discarded
despite the detailed provisions set out in modern insolvency legislation, all of which
must be taken to have been enacted against the background of the rule.” – UK Supreme Court
The deliberate evasion of insolvency laws must be separated from commercial transactions entered into in good faith with good intentions.
A three stage test has been proposed to determine if the rule should apply:
Is there any property capable of being deprived?
Does the relevant contractual term deprive creditors of the property upon insolvency?
Was the deprivation an illegitimate evasion of the rule? Or was it a commercial agreement entered in good faith with good intentions?
In the future, where a transaction might not squarely fit anti-avoidance legislation we can expect insolvency practitioners and their lawyers to rely more and more on the anti-deprivation provisions of the common law. And this is a good thing for equity and efficiency in insolvency administrations.