Folgate London Market Ltd v Chaucer Insurance plc [2011] EWCA Civ 328

Folgate agreed to indemnify Milbank under a settlement agreement containing a clause releasing Folgate from payment if Milbank became insolvent before payment was due. When Milbank entered administration, Chaucer (as assignee) challenged the clause. The Court of Appeal held clause 11 void as infringing the anti-deprivation principle.

Facts

Following a personal injury claim by Justin Mayhew against Milbank Trucks Limited, Milbank sued its insurance broker Folgate for negligent arrangement of insurance cover. The parties settled in August 2006, with Folgate agreeing to indemnify Milbank against Mayhew’s claim. Clause 11 of the settlement agreement provided that if Milbank entered liquidation, administration, or receivership before the payment date, Milbank’s right to indemnity would cease and Folgate would be released from all obligations.

Milbank entered administration in November 2008 and assigned its interest in the settlement agreement to Chaucer Insurance. Chaucer sought to enforce the agreement against Folgate, who relied on clause 11 as releasing it from liability.

Issues

Principal Issue

Whether clause 11 of the settlement agreement was void as infringing the anti-deprivation principle, which prevents contracting parties from removing assets from the estate of an insolvent party that would otherwise be available to creditors.

Judgment

The Court of Appeal unanimously dismissed Folgate’s appeal. Lord Justice Rimer delivered the main judgment, holding that clause 11 infringed the anti-deprivation principle.

The court rejected Folgate’s new argument that clause 11 was commercially linked to Milbank’s assistance obligations under clauses 5 and 9.1, describing this as:

‘fanciful’

Rimer LJ characterised the true purpose of clause 11:

‘it was apparently a naked attempt to provide that, whilst Milbank’s right to payment and Folgate’s obligation to pay were to survive so long as the payment would accrue exclusively to the benefit of Mr Mayhew, they were to be extinguished if such payment would instead be available for Milbank’s creditors generally in the event of its insolvency. This is not a commercial purpose so much as a collateral device to avoid the consequences of the insolvency legislation.’

The court relied heavily on Ex parte Mackay (1873), where James LJ stated:

‘a man is not allowed, by stipulation with a creditor, to provide for a different distribution of his effects in the event of bankruptcy from that which the law provides. It appears to me that this is a clear attempt to evade the operation of the bankruptcy laws.’

Implications

This case reinforces the anti-deprivation principle as a fundamental rule of insolvency law. Contractual provisions that purport to deprive an insolvent party of assets that would otherwise be available to creditors upon the occurrence of an insolvency event will be struck down as contrary to public policy. The ‘flawed asset’ argument—that the asset never truly belonged to the insolvent because it always contained the defeasance condition—was rejected where the condition is specifically triggered by insolvency. The decision confirms that parties cannot contract out of the statutory insolvency distribution scheme.

Verdict: Appeal dismissed. Clause 11 of the settlement agreement was held void as infringing the anti-deprivation principle. Chaucer, as assignee of Milbank’s rights, was entitled to enforce Folgate’s payment obligations under the agreement.

Source: Folgate London Market Ltd v Chaucer Insurance plc [2011] EWCA Civ 328