Creditors Protected by Court of Appeal

A recent case has confirmed that a clause in a contract which absolves one party from paying the other in the event that the second party becomes insolvent is invalid as it infringes the ‘anti-deprivation’ principle.

The principle exists to protect creditors of insolvent people and businesses, who would otherwise face increased losses if the insolvent party no longer had a right to enforce its debts.

In the case in point, a man was injured in an accident involving a lorry owned by a haulage company. The haulage firm’s insurers declined to pay on the ground that the accident was not covered under the policy terms. The injured man sued the haulage firm and the driver of the lorry and won. The haulage firm sued its insurance broker for negligence in arranging the insurance policy on the ground that the risk should have been insured.

The haulage company went into liquidation. Its agreement with the insurance broker contained an indemnity from the broker. However, the terms of the indemnity stated that should the company become insolvent, the broker’s indemnity would be invalid. The insurance broker argued that the indemnity was merely an agreement to indemnify, not an asset per se, and thus the company’s insolvency released it from its obligation to pay.

The Court of Appeal rejected the argument, holding that it would be a breach of the anti-deprivation principle.