Automatic termination of indemnity upon insolvency event breaches anti-deprivation rule – Mayhew v King, High Court

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T agreed to indemnify M in a contract in relation to some particular litigation that may be brought against M. The agreement said that the indemnity would automatically end if M suffered any insolvency event. M went into administration and the benefit of the contract was assigned to the purchaser. The purchaser then tried to rely on the indemnity, but T said that it no longer applied. The purchaser claimed that this offended against the ‘anti-deprivation’ principle, and the High Court agreed. Under the anti-deprivation principle, a contract provision cannot deny the company’s creditors from benefiting from an asset that the company had had immediately prior to the insolvency process. The High Court said this included the right to benefit from an indemnity. It was permissible for an indemnity to be limited in time, but not insofar as this related to the insolvency proceeding and had the effect of denying creditors the right to benefit from the asset.