The Principle against Divestiture in Insolvency Revisited: Fraser v. Oystertec

Abstract

It is second nature to almost every insolvency practitioner that parties cannot by agreement subvert the fundamental principle of pari passu distribution of an insolvent's assets. It thus follows that, for example, 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. Similarly, contractual set-off provisions resulting in a distribution of an insolvent's property in a manner contrary to the pari passu principle are invalid. It has been said that the above propositions are limited to liquidation or bankruptcy because the pari passu principle is concerned to ensure an equitable distribution of the insolvent's estate among its creditors and liquidation or bankruptcy is the only collective insolvency process which involves the distribution of assets among the general body of creditors. Put simply, it is second nature to almost every insolvency practitioner to lump the principle against divestiture and the principle of pari passu distribution into one interchangeable mass. However, the recent decision in Fraser v. Oystertec has conclusively proved that almost every insolvency practitioner's second nature is wrong. The principle established in ex p. Mackay and British Eagle has nothing whatsoever to do with the so-called fundamental principle of pari passu distribution, and hence its operation is not limited to formal insolvency proceedings. This decision may also have cast some doubt on the operation of contractual set-off and netting even prior to any formal insolvency proceedings.