Property & Insolvency - September 2010

Article by Simon Painter and Nitej Davda

INTRODUCTION

At the time of going to press the future for construction giant and FTSE 250 company Connaught remains uncertain. In all probability by the time this bulletin is received its social housing arm will have been placed into administration putting around 10,000 employees at risk and causing an inevitable ripple effect which will be felt across the sector.

Whilst certain subsidiaries within the Connaught group appear safe for now the reason for the apparent demise of what it is best known for is a combination of holding loss making contracts, public spending cuts, mounting debt and an inability to secure a refinancing package from the banks.

The end for Connaught as we know it (a company that at its peak was worth over half a billion pounds) follows on the heels of a very high profile casualty in the legal sector. The law firm Halliwells LLP was placed into administration in July and its assets are now in the process of being acquired by other law firms. At its peak, like Connaught, it was one of the largest businesses in its sector in the UK. The Lawyer, a weekly publication aimed at the legal sector, ranked Halliwells at the end of 2009 as the 39th largest law firm in England and Wales, with a turnover of £83m and net profits over just under £12m.

The reasons cited by Halliwells for its demise were high property costs, exacerbated by the effect of the economic downturn as the reason for their plight. Halliwells took a lease of premises in Manchester at the height of the property market.

Both Connaught and Halliwells were seen as big players in their respective markets and unlike Woolworths and Zavvi (whose market shares could clearly be seen to be squeezed by a combination of their competitors on the high street and on-line) their demise (in the case of Connaught, apparent demise) has taken many by surprise. They are illustrations however of the fact that the effect of the economic downturn and Government spending cuts will continue to be felt for many months to come, and that insolvency based issues such as those covered in this bulletin and previous editions of it will continue to be relevant to those involved in the property sector.

If, having read this bulletin, you would like more information in relation to the matters covered please do contact us.

A MATTER OF PRINCIPLE – THE ANTI-DEPRIVATION RULE

By Lynsey McIntyre

The underlying policy of the Insolvency Act 1986 is that all assets of an insolvent organisation must be made available for distribution amongst its creditors. However, the courts also have the power to prevent parties from contracting out of the statutory regime. This long established common law principle known as the anti-deprivation principle has been used by the courts over the years to strike down contractual provisions which attempt to do just that. The principle has received an airing in two recent High Court decisions.

Mayhew v King & Another (2010) concerned the scope of 'assets' covered by the principle. M engaged an insurance broker, T, to arrange insurance cover through C in connection with M's haulage activities. The scope of the cover was found to be potentially inadequate (when M was sued by Mr Mayhew for substantial damages and C initially refused to provide cover) and this led to M suing T for negligence. The negligence claim was settled by M and T entering into an agreement under which T would be responsible for reimbursing to M 85% of any sums to be paid to Mr Mayhew The settlement agreement contained a termination clause with the effect that T would be released from its obligation to indemnify M, if M became insolvent.

M subsequently went into administration and M's administrators assigned the benefit of the settlement agreement with T to C so that C could recover directly, on behalf of M, 85% of any sums payable on M's behalf. C sought to enforce the settlement agreement against T but T relied upon the termination clause, the effect of which would be that the settlement agreement would come to an end, M would lose the benefit of the indemnity and M's unsecured creditors would have to meet any shortfall rather than T.

C's response was that the termination provision was unenforceable under the anti-deprivation principle. C claimed that the clause operated to permanently deprive M's creditors of a valuable asset for distribution.

In response T argued that the anti-deprivation principle does not apply to a right to enforce an interest, in this case the indemnity, particularly in circumstances where the parties had negotiated the terms of the agreement themselves. The court however agreed with C and found that the termination provision in the settlement agreement offended against the anti-deprivation principle and was void as a result. The judge held that the principle could be applied to such rights created by a contract, even where the contracting parties had agreed limits to the duration of those rights. If the effect of the limitation essentially deprives an organisation's creditors of the benefits of the indemnity on the organisation's insolvency, then the limitation will be void.

This is a salient reminder that contractual limitations (for example in any guarantee) relating to insolvent events in any form of contract (particularly indemnities or other contracts which give rise to a right of legal action) are vulnerable to being struck down if the court considers that the intention and effect of the limitation is to deprive the insolvent company and its unsecured creditors of a valuable asset.

The anti deprivation principle has recently had a second airing, in the somewhat more high profile dispute concerning the Portsmouth City Football Club (and its administrators) and HMRC. At a recent high court hearing in which HMRC sought to have a company voluntary arrangement entered into by the club set aside, concerns were raised by HMRC that the so-called 'football creditor's rule' fell foul of the anti deprivation principle. The football...