04 December 2003

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Divesting company of assets on insolvency - is it valid?

The High Court has held, in an application for summary
judgment, that an agreement that a company's property shall
be transferred out of its ownership on its insolvency is void.
This finding extends the well-established common law rule
of public policy, as most recently repeated and explained
in the case of Money Markets Limited v London Stock Exchange
([2002] 1 WLR 1150): that it is not possible to contract that
on a person's bankruptcy, that person's property ceases to
be his and transfers to another person. Without such a
general principle, parties could effectively contract out
of the insolvency regime of English law to the detriment
of the insolvent party's other creditors.

Previously, only agreements that referred to the commencement
of an insolvency procedure such as bankruptcy or liquidation had
been found to be ineffective. It seems that now an agreement
that purports to divest a company of its property when that
company becomes insolvent under section 123 of the Insolvency
Act 1986 will also be void. In other words, it is not necessary
for the agreement to specify that the company enter into an
insolvency procedure for the agreement to be void. This
case is a welcome clarification of the extent of this old
principle; as the Judge, Peter Prescott QC, said to limit
the application of the principle to where formal insolvency
steps are taken would be "mere pointless form and the
mischief would not be addressed fully."

To read this article in full please click on the link below:


http://www.law-now.com/CS2000/internet/EN/co50law-now/co55archive/2003/f
raserothersvoystertecplcotherspatents.htm

For further information, please contact Martin Brown at
martin.brown@cmck.com or on +44 (0)20 7367 2590





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