Introduction

Introduction

A clause in a settlement agreement, which provided that an indemnity would cease on a company's insolvency, infringed the anti-deprivation principle as it deprived the insolvent company's administrators of an asset for distribution to creditors. A purported "contracting out" of the insolvency legislation was contrary to public policy and the clause was void (Folgate London Market Ltd v Chaucer Insurance Plc www.bailii.org/ew/cases/EWCA/Civ/2011/328.html).

In a recent case, the court held that a party to a settlement agreement (in this case a broker) cannot restrict the indemnity it is providing so that the indemnity is not payable if the insured goes into administration, or liquidation, or undergoes some other insolvency event. The decision is important on its own facts. But it does also raise questions about the legitimacy of other clauses in insurance contracts which depend on whether or not the insured or reinsured has entered into any kind of insolvency event.

The court has a limited discretion not to make a bankruptcy order where the debt is the subject of a statutory demand which has not been paid and is outstanding at the time of the bankruptcy petition hearing.

Clauses common in syndicated facility agreements were considered and construed in favour of the majority lenders:

-- Strategic Value Master Fund Ltd v Ideal Standard International Acquisition S.A.R.L. (England, High Court, 4 February 2011)

This case involved an examination of clauses common to syndicated facility agreements. The agreement here was based on the LMA standard.

In another case involving administrators, an employment tribunal somewhat controversially has held that the individual administrators could be liable as principals in an agency relationship with employees of a company in administration.

Improved Rights for Unsecured Creditors of Insolvent Companies

In our December 2010 insolvency update, we reported on the UK High Court's decision in BNY Corporate Trustee Services Limited v Eurosail.

In the recent case of BNY Corporate v Eurosail[1], the Court of Appeal for the first time considered how the 'balance sheet' test of corporate insolvency in section 123(2) Insolvency Act 1986 (IA 1986) should be applied.

Section 123(2) IA 1986 provides:-

'A company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company's assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities.'