The anti-deprivation rule (also known as fraud upon the bankruptcy law) is a principle applied by the courts in common law jurisdictions (other than the United States) in which, according to Mellish LJ in Re Jeavons, ex parte Mackay,[1] "a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws." Wood VC had earlier observed that "the law is too clearly settled to admit of a shadow of doubt that no person possessed of property can reserve that property to himself until he shall become bankrupt, and then provide that, in the event of his becoming bankrupt, it shall pass to another and not to his creditors."[2]
It arises from the general principle (known as the "rule against repugnancy" in property law) that a grantor may not derogate from his own grant by giving an absolute interest in an asset and then providing for it to be clawed back otherwise than for fair value in stated eventualities, including (but not limited to) bankruptcy and winding up. This is considered to consist of several branches:
Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd and Lehman Brothers Special Financing Inc observed that the general principle consists of two subrules the anti-deprivation rule and the pari passu rule, which are addressed to different mischiefs[3] and held that, in borderline cases, a commercially sensible transaction entered into in good faith should not be held to infringe the first rule.[4] The relationship between the two rules was expanded upon later by Longmore LJ in Lomas v JFB Firth Rixson Inc:[5]
In 2012, the Chancery Division, in assessing the football creditors rule, held that it was valid and did not violate either the anti-deprivation rule or the pari passu rule. In his judgment, Richards J, relying on Belmont Park, declared:[6]
With respect to the anti-deprivation rule, Patten LJ has observed that "the individual bankrupt or insolvent company may not contract at any time, either before or after the making of the bankruptcy or winding-up order, for its property subsisting at that date to be disposed of or dealt with otherwise than in accordance with the statute."[7] It is argued that this rule can therefore be subdivided into two branches: the "insolvency-triggered deprivation" rule looks to disposals, and the "contracting out" rule to dealings. These subrules target two distinct strategies that a debtor might pursue:
All these anti-avoidance rules are, however, subject to the very large exception that creditors remain able to jump up the priority queue, through the creation of a security interest.
Certain types of arrangements are not considered to offend the rule:
Other types are normally considered to offend:
This case arises infrequently, but it did so notably in British Eagle International Air Lines Ltd v Compaigne Nationale Air France.[8] Several principles arise from it:
In Lomas v JFB Firth Rixson Inc it was argued that certain provisions in standard form ISDA Master Agreement might offend against the rule; specifically that if an Event of Default (as defined) suspended the right of the Defaulting Party to receive payment indefinitely, then that would mean that if the Non-Defaulting Party went into liquidation, the operating effect of the provision was to deprive the company's creditors of assets as a consequence of it going into liquidation. However the Court of Appeal considered the principles outlined in Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd, and held that "If this is the touchstone then it is difficult to see how Section 2(a)(iii) of the Master Agreement can be said to offend against the anti-deprivation principle. ... There is no suggestion that it was formulated in order to avoid the effect of any insolvency law or to give the non-defaulting party a greater or disproportionate return as a creditor of the bankrupt estate."[9]
This subrule has been described by Cotton LJ as holding that "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."[10] This is considered to be a true anti-deprivation rule, and several issues arise from it:
The Canadian courts have extended this further, declaring that termination clauses that are triggered where non-payment of obligations is indirectly caused by the debtor's insolvency should be deemed to have been caused by the insolvency.[11]
In October 2020, the Supreme Court of Canada upheld a decision of the Alberta Court of Appeal which affirmed that the anti-deprivation rule existed as part of the common law in Canada.[12] The SCC departed from the UK Supreme Court's judgment in Belmont Park, in holding that an effects-based test must be used in applying the rule, as that was a logical consequence of the requirement of Canada's Bankruptcy and Insolvency Act that the bankrupt's property must "immediately pass to and vest in the trustee".[13]