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, "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."
General scheme
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:
General principle
Anti-deprivation rule
"Contracting out" rule
"Insolvency-triggered deprivation" rule
Pari passu rule
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 and held that, in borderline cases, a commercially sensible transaction entered into in good faith should not be held to infringe the first rule. The relationship between the two rules was expanded upon later by Longmore LJ in Lomas v JFB Firth Rixson Inc:
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:
the anti-deprivation rule applies from the commencement of administration
the pari passu principle comes into play only if the purpose of the insolvency procedure is to effect a distribution if a transaction has the effect of depriving a company of an asset in order to distribute it among some only of the creditors otherwise eligible to participate in a distribution, it offends both principles if the deprivation occurs on the company going into administration, only the anti-deprivation principle will be engaged
Aspects of the rule
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." 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:
it could favour a nominated party on insolvency could either provide for a specific insolvency-triggered deprivation of its assets in favour of that party (being assets that would otherwise be available for distribution on the debtor's insolvency), or it could agree to more attractive contractual set-offs or netting arrangements, thus avoiding the distribution rules that would otherwise apply to the debtor's property.
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.
Scope of application
Certain types of arrangements are not considered to offend the rule:
limited and determinable interests and licences
preemption provisions in articles of association
provision for termination on winding up of interest annexed to membership status
Other types are normally considered to offend:
provision for divestment of ownership of an asset on winding up
vesting clauses in building contracts (which vest the builder's materials in the building's owner upon the builder's liquidation) sale with provision for retransfer on winding up (where the seller did not reserve title until payment) increase in a company's contractual obligation on winding up