The deprivation principle, as derived from the authorities is
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, go over to someone else and be taken away
from his creditors".
To deprive the creditors in this way would be contrary to public
policy.
Usually Shareholder Agreements
("SHA"), or Joint Venture Agreements
("JVA"), include a provision, that
provided that, if any shareholder or party to the SHA, or JVA,
suffers an insolvency event then the other contracting
party/shareholder, or partner, shall have the right to serve a
notice, on the insolvent shareholder/partner, to sell to him, its
shares in the JV Company, at a price stated to be, at a fair
value.
Cyprus Company Laws (as far as concerned legal entities), as
well as Cyprus Bankruptcy Law –(as far as concerned
physical persons), contain mandatory provisions, ensuring that the
estates of insolvent, or bankrupt persons, are not improperly
diminished, in the event of their insolvency, or bankruptcy.
Under Cyprus Law, if any agreement has the effect of prejudicing
creditors of a Company, in the event of insolvency, or of a
physical person, in the event of bankruptcy, by the actual or
effective removal of assets, from the insolvent, or bankrupt
estate, is void as initio as violating the public policy, of the
Republic of Cyprus (e.g. transactions at an undervalue, or
fraudulent preferences.)
The anti-deprivation rule also applies irrespective of, whether
the deprivation provision in question, is included as part, of the
initial bargain, between the parties, and irrespective of whether,
the provision can also operate on an event, other than insolvency,
or bankruptcy.
The facts that the partner have good business reasons for
entering into the arrangements, do not direct their minds to the
question, how they might be effected by insolvency or bankruptcy,
and enter into them at arms length, are irrelevant.
However, the legal principles laid down in the recent English
Appeal Court Case BUTTERS AND OTHERS –V- BBC
WORLWIDE LTD AND OTHERS (2010), provide a useful guidance
to the drafters of SHA, and JVA, in order to extinguish, or avoid
the application of the anti- deprivation rule.
The English Court of Appeal, stated that the anti-deprivation
rule, could be avoided by careful drafting, and that when
considering whether, the rule applied in any particular case,
unless the transaction is a sham, there was in principle, no
difference between cases, where the provision effecting the
deprivation, applied on insolvency, or liquidation, and those where
it applied in other circumstances; that since the insolvency Act.
1986, contained an extensive code, it was for the Parliament, to
legislate against schemes, which sought to avoid the anti-
deprivation rule; that on those circumstances, the Court should not
extend, the rule beyond its present limits, unless logic,
practicality or legislation required it, nor invent anti-avoidance
policies, which frustrated the terms of commercial contracts,
freely entered into, by sophisticated parties, the need for the law
to be clear and consistent, being all the greater in the light of
the increasingly complex nature of commercial contracts.
The legal principles laid down in the above English Appeal Court
Case are of guidance to Cypriot Courts, and as a result, the
anti-deprivation rule may be avoided by careful drafting of SHA or
JVA.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
Specific Questions relating to this article should be addressed directly to the author.
A discussion relating to a recent decision, which has important implications for insolvency procedures and particularly the difference between Cayman Islands law and the UK and USA.
A guide which outlines the procedures to wind up Jersey registered companies, the circumstances in which transactions entered into by an insolvent company may be set aside, and the circumstances in which a company’s officers and managers may incur civil or criminal liability.
Did you know that the court's guiding principle on assessing remuneration for liquidators in respect of their administration of trust assets held by the company is similar to the principle applicable to liquidation work, that is, on a "value for money" basis rather than as an indemnity against cost?
It is very difficult for those practising in the field of cross-border insolvency and restructuring not to notice the significant moves towards international comity by various jurisdictions around the world.
Twitter
Facebook
Digg 
