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Making Sense of Arguments about the Anti-Deprivation Rule

Sarah Worthington, Professor of Law, London School of Economics and Political Science, London, UK

The anti-deprivation rule

Liquidators and administrators are skilled in increasing the payouts to creditors. To that end, practitioners faced with the fallout from the GFC have become increasingly interested in an old common law rule, now dusted down and re-branded as 'the anti-deprivation rule'. Its 19th-century formulation remains apt: ‘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.’ That is the UK version. The US version, the ipso facto rule, is enshrined in statute.

A contractual arrangement which infringes the rule is void. Avoidance increases the asset pool available for distribution to the insolvent’s general creditors. Conversely, if the rule is not infringed, the agreement will operate according to its terms and deliver the intended insolvency advantage to the nominated party.

The rule has been applied by courts since at least the 18th century. On its face it looks simple, yet the line between what is permitted and what is not remains surprisingly unclear. Lord Neuberger made this plain in both Perpetual Trustee and Money Markets. The only House of Lords authority is British Eagle. Earlier this year, the ICR published my analysis of the Court of Appeal decision in Perpetual Trustee,9 but the issues clearly merit wider discussion.

What follows is an analysis of the arguments commonly advanced against application of the anti-deprivation rule, either generally or in specific circumstances.

Preliminary issue: is the anti-deprivation rule one rule or two?

In my earlier ICR article,10 I suggested that the anti-deprivation rule comprised two sub-rules, a 'contracting out' rule and an 'insolvency-[triggered] deprivation' rule. That remains my position. But since the terms 'contracting out' and ‘deprivation’ are also frequently used in the cases, my labels may need further explanation.


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