The Anti-Deprivation Principle

Background

The anti-deprivation principle is a long established rule of common law based on the proposition that one cannot contract out of the provisions of the insolvency legislation. The anti-deprivation principle therefore supplements the Insolvency Act 1986 ("IA86") by invalidating attempts to avoid its objectives.

Pari Passu

The anti-deprivation principle protects the pari passu distribution of assets – or the rule that all property owned by a company or an individual as at the commencement of the relevant insolvency process should (subject to prior payment of legally recognised secured or preferential liabilities and expenses) be applied rateably in satisfaction of liabilities.

Infringement of the principle

The infringement of the anti-deprivation principle can be most commonly found in the following two examples:

Contracting out of pari passu distribution: in the landmark case of British Eagle International Limited v Compagnie Nationale Air France (1975), the House of Lordsdecided that the process of distribution to certain creditors under the International AirTransport Association ("IATA") clearing house system infringed the pari passu principleas the IATA creditors were to receive more than their proportionate share of thecompany's assets. So a contract that elevates a creditor or a group of creditors abovethe others on insolvency is therefore not permitted. However, creditors can relegatetheir own interests beneath the others without infringing the anti deprivation principle,by for instance, entering into subordination agreements that prevent a creditor orcreditors from proving until the others have been paid in full.

Contracts removing assets from the insolvent estate: the anti-deprivation principle also prevents the enforcement of a contract under which property is removed from the estate on insolvency...