Key insolvency principle gets court backing

A NEW COURT ruling around a key insolvency principle could provide a boost to US administrators of Lehman Brothers.

The UK Court of Appeal found that contracts cannot give one creditor a higher status than another creditor of an insolvent company, effectively backing what is known as the anti-deprivation principle. The principle requires all creditors in an insolvency to be treated equally.

Today’s decision could inadvertently benefit US administrators of Lehman Brothers.

The administrators are fighting to prevent a consortium of investors known as Belmont Park Investments from obtaining a higher status for repayment over other creditors. 

Belmont believes its contract with the collapsed bank gives it super creditor status. The administrators argue this is in breach of the anti-deprivation principle.

A decision on that case is due later this year.

Today’s ruling concerned Towergate v Chaucer.

Towergate, an insurance brokerage company, believed it no longer owed compensation to an insolvent trucking company, as the business violated its contract. However, it was argued in court that retaining those funds deprived other creditors of payment.

A Court of Appeal today upheld a High Court decision that clauses in a contract that fell foul of the anti-deprivation insolvency principle, were void.

Broker Towergate arranged an insurance policy with insurer Chaucer for the transport business Milbank. Following a traffic incident involving a Milbank employee, it was revealed Chaucer did not cover road accidents. Towergate was contacted to compensate the business – as long as it didn’t become insovlent before payments were made.

However, the business entered administration before making those payments. The administrators handed over the business’ rights to insurer Chaucer who sought the compensation funds from Towergate. The broker refused citing contract law.

Paul Cox, a lawyer from Browne Jacobson who acted for Chaucer, said: “This judgment demonstrates the ongoing relevance of the anti-deprivation principle and the profound effects that this can have on commercial contracts.

“Further guidance on the principle can be expected to come from the Supreme Court when the judgment in Belmont is handed down.”