Belmont Park Investments Pty Limited v BNY Corporate Trustee Services Limited [2011] UKSC 38
This is another recent case to come out of the Lehmans administration. Lehmans operated the "Dante programme" in which investors invested in notes issued by a special purpose vehicle subsidiary of Lehmans. The issuer used investors' money to buy a basket of bonds, with another Lehmans company (LBSF) agreeing to repay the notes and interest in return for receipt of yields from the underlying bonds. The bonds were held in the name of a trustee. The contractual documentation provided for each of LBSF and investors to have charges over the bonds with LBSF's charge taking priority. The documentation provided that the priority would reverse in the event of an event of default so that the investors' charge would have priority over that of LBSF. LBSF filed for Chapter 11 Protection in the US, so investors gave notice of default and the trustee of the bonds applied the "priority flip" in relation to the security. LBSF challenged this on the grounds that it was contrary to the "anti-deprivation" principle, namely that the effect of the provision was to deprive LBSF's creditors of property that would otherwise be realised on its insolvency. Lehmans lost before the High Court and the Court of Appeal. It appealed to the Supreme Court.
The Supreme Court also held that the anti-deprivation provision did not apply and dismissed the appeal. Lord Collins gave the leading judgment. The essence of his decision was that "party autonomy" was at the heart of English commercial law. Plainly, there were limits to party autonomy in the field of insolvency, not least because the interests of third party creditors were involved, but it was desirable that, as far as possible, the Courts should give effect to contractual terms which the parties have agreed. There was a particularly strong case for autonomy in cases of complex financial instruments such as those involved here.
Except in the case of a blatant attempt to deprive a party of property in the event of liquidation, the modern tendency had been to uphold commercially justifiable contractual provisions which have been said to offend the anti-deprivation rule. The policy behind the anti-deprivation rule was clear, that the parties cannot, on bankruptcy, deprive the bankrupt of property which would otherwise be available for creditors. It is possible to give that policy a commonsense application which prevents its application to bona fide commercial transactions which do not have as their predominate purpose, or one of their main purposes, a deprivation of the property of one of the parties on bankruptcy. The priority flip was an expression of the underlying commercial bargain. There was never any suggestion that the priority flip was deliberately intended to evade insolvency law. Lord Collins also noted that the fact that the note holders would have priority in the event of LBSF's insolvency was a very material factor in obtaining AAA credit ratings which enabled Lehmans to market the notes.
One of the themes in previous decisions concerned "flawed assets", i.e. assets where one party grants to another a proprietary interest that automatically determines on insolvency. An example is the right of a landlord to forfeit a lease on insolvency of the tenant. Generally the Courts have regarded flawed assets as falling outside the scope of the anti-deprivation principle, on the grounds that the beneficiary is not deprived of property since it was only entitled to the property whilst it was solvent. It is, of course, not easy to distinguish between an asset which renders an interest terminable on insolvency (a flawed asset) and one where an absolute interest is taken away on insolvency. Lord Collins did not make much of the issue – he made it plain that the key test was whether or not there was a commercial transaction entered into in good faith, without an intention to evade insolvency law.
Two of the Judges gave support to the approach of Briggs J in the High Court that it makes a difference whether the party in insolvency has performed its side of the bargain. In this case, LBSF never really suffered any loss, in that it did not provide the funds for the purchase of the notes in the first place.
The Court of Appeal had said the anti-deprivation principle should have no application given the modern day scope of insolvency legislation whereas the Supreme Court said it still had life but only in certain circumstances. The Supreme Court (Lord Collins) seemed just to note the cases where it did not apply and the cases where it did apply and therefore we are left to look at each case on its specific facts - this reinforces the point about making sure that there is a paper trial as to why at the time a clause was drafted where an interest appears to be determinable on insolvency, so as to demonstrate in the event of challenge why it was bona fide and that there was commercial justification for doing so.
This decision is good news for clauses in commercial contracts which incidentally provide for events to occur on the insolvency of a party. But the case does still not completely clarify the position over a provision such as a bad leaver provision (e.g. purchase of a party's interest following misbehaviour at less than market price); it might still fall foul of the anti-deprivation rule, so take care.
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