06/11/2009 - BBC Victory against Woolworths restores the anti-deprivation principle

The judgment of the Court of Appeal in the conjoined appeals Perpetual Trustee Co Ltd  v BNY Corporate Trustee Services Ltd ("Perpetual") and Butters v BBC Worldwide Ltd ("Butters") [2009] EWCA Civ 1160 concerns the so-called "anti-deprivation principle" that, in summary, "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".

In Perpetual, the administrators of Lehman Brothers Special Financing Inc ("LBSF") contended that the anti-deprivation principle applied to a number of synthetic collateralised debt obligations, set up through the medium of a special purpose vehicle ("SPV"), so as to vitiate provisions which, on an insolvency event, switched the priority over the assets and changed the allocation of unwind costs" in favour of the noteholders to the potential detriment of LBSF.  At first instance, the Chancellor found that the principle did not apply.  

In Butters the administrators of Woolworths contended that the anti-deprivation principle rendered void or unenforceable the termination provisions in a master licence between BBC Worldwide ("BBCW") and a joint venture company with the result that BBCW was obliged to buy Woolworth's shares in the joint venture on the basis that the master licence still subsisted (thereby considerably increasing the price payable). At first instance, Mr Justice Peter Smith held that the anti-deprivation principle did apply, but only to ‘blue pencil' certain (immaterial) parts of the clause.  In addition, he held that because the parties had subsequently entered into a temporary licence, the master licence would have been thereby terminated in any event.

The Court of Appeal (Neuberger MR presiding) dismissed appeals by both sets of administrators and allowed BBCW's cross-appeal.  The court held, in summary, that the underlying purpose of the anti-deprivation principle was to uphold the Insolvency legislation and prevent parties from contracting out of it; in an area where Parliament had intervened so substantially and so significantly, it could only be very exceptional circumstances in which the court would be prepared to invent its own anti-avoidance policies and frustrate the terms of commercial contracts freely entered into by sophisticated parties. In particular, the principle could not apply unless the deprivation took place after the insolvency or administration process formally commenced. In relation the Butters appeal, the Court of Appeal further upheld the Judge's finding that, by entering into the temporary licence, the master licence would have terminated in any event - and rejected the contention that the temporary licence was void for common mistake or subject to an express or implied condition precedent.