Good Faith, Flawed Assets and the Emasculation of the UK Anti‐Deprivation Rule
| DOI | http://doi.org/10.1111/j.1468-2230.2012.00892.x |
| Date | 01 January 2012 |
| Published date | 01 January 2012 |
| Author | Sarah Worthington |
Good Faith, FlawedAssets and the Emasculation of
the UK Anti-Deprivation Rule
Sarah Worthington*
The Supreme Court’s unanimous decision in Belmont Park Investments Pty Ltd vBNY Corporate
Trustee Services Ltd and Lehman Brothers Special Financing Inc is of major significance to lenders,
especially those in the global structured finance market. This case confirms the validity of
commonly used insolvency-triggered secured-priority flip clauses, and, more generally,suggests a
dramatically reduced role for the common law anti-deprivation principle.The decision may not
fully resolve market uncertainty, however, given the particular analysis adopted in the case itself
(analysed here) and its divergence from the US statutory approach to the same principle.
The latest round in the complex Lehman Bros liquidation involved a pitched
battle over the validity of contractually agreed insolvency protection clauses. If
valid, these clauses would provide effective protection to contracting investors,
but only at the expense of Lehman’s general creditors. In judgments which
powerfully backed freedom of contract and commercial certainty, the Supreme
Court unanimously upheld the validity of these protective provisions, denying
that they offended the common law anti-deprivation principle. In this result,the
UK has positively set its face against the broader approach to creditor protection
favoured in US bankruptcy legislation.
This note describes the common law principle and explores the limits of the
Supreme Court decision in Belmont Park Investments Pty Ltd vBNY Corporate
Trustee Services Ltd and Lehman Brothers Special Financing Inc1(Belmont). In par-
ticular, and bearing in mind that each future case will still need to be considered
on its facts, this note also considers whether the Supreme Court decision delivers
the commercial certainty so eagerly awaited by the financial markets.
THE ANTI-DEPRIVATION PRINCIPLE AND ITS SUB-RULES
Put simply, the long-standing common law anti-deprivation principle precludes
an insolvent from agreeing to a depletion or distribution of its property other
than in accordance with the statutory insolvency distribution scheme. Until
Belmont, courts in England adopted a single integrated formulation of this
principle. ExpJay(Jay) was typical: ‘there cannot be a valid contract that a man’s
property shall remain his until his bankruptcy, and on the happening of that event
shall go over to someone else, and be taken away from his creditors.’2
*Downing Professor of the Laws of England,University of Cambridge.
1 [2011] UKSC 38. In reaching this unanimous decision,the Supreme Court upheld the decisions of
the lower courts,although on different grounds: see PerpetualTrustee Co Ltd vBNY CorporateTrustee
2 (1880) 14 Ch D 19, 26.
Good Faith, Flawed Assets and the Emasculation of the UK Anti-Deprivation Rule
© 2012 TheAuthors. The Modern Law Review © 2012The Modern Law Review Limited.
112 (2012) 75(1) MLR 78–121
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