Contracting out of the Fundamental Principles II - Pari Passu Flashcards
Re Jeavons ex parte Mackay (1873) LR 8 Ch App 643, 647-648
Case: J sold patent to B in consideration of B paying royalties to J, B also lent J £12,500 and it was agreed B should retain half the royalties as they became payable towards satisfaction of the debt and that if J became bankrupt (except on a petition presented by B) B could retain the whole of the royalties in satisfaction of the debt; J went bankrupt on a petition presented by another creditor
Decision: The 1st transaction is valid but the 2nd is not
Rule: A contract cannot prefer one creditor over another on insolvency
Quote: “A person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws.” per Mellish LJ
Re Wilkinson ex parte Fowler [1905] 2 KB 713
Case: Building contract provided that “if engineer shall have reasonable cause to believe that the contractor is unduly delaying proper payment to the firms supplying the machinery, he shall have the power… to order direct payment to them”; contractor went bankrupt owing £836 to suppliers and being owed £1575 by employer; engineer ordered direct payment to suppliers by employer
Decision: Direct payment issued as bankruptcy was unduly delaying payment. there was no incentive in this case to bring winding up petition.
Rule: (Overruled in British Eagle) Intention of clause is relevant.
Re Johns [1928] Ch 737
Case: Mother lent son £1,650 (secured on son’s entitlement in reversion under his father’s will subject to his mother’s life interest) but agreement provided (i) mother should retain “a bonus” of £1,000 at start of the loan; (ii) on death of mother, if son had neither charged loan or gone bankrupt, debt could be discharged by repaying £650; (iii) if son went bankrupt in lifetime of mother then mother could claim against trustee in bankruptcy £1,000 plus £650 with interest; son adjudicated bankrupt
Decision: Clause (iii) was void, she had only lent him £650 and this was a clear fraud on the bankruptcy laws as she attempted to increase her share on insolvency
Re Apex Supply Co Ltd [1942] Ch 108, 113-114
Case: Under hire purchase contract, if hirer went into liquidation owner could repossess goods, in which case hirer liable to pay a sum which together with payments already made shall equal £1020; hirer could also terminate agreement subject to making minimum payments already made shall equal £1020; hirer went in to liquidation
Decision: Held to be valid
Rule: The key is that where the only way the clause became active is liquidation it is void - intention
British Eagle International Airlines Ltd v Compagnie Nationale Air France [1975] 2 All ER 390 (HL)
Case: IATA Rules reg 18(b) provided as follows -
“That it shall be deemed to be an express term of every contract agreement or arrangement for the time being subsisting between any two members in respect of which any debit of credit (being debit or credit of a type for the time being handled by the Clearing House) may arise that the amount of such debit or credit shall be payable or receivable by and through the medium of the Clearing House in accordance with the Regulations and current clearing procedure and not otherwise in any manner.”
When British Eagle wound up it had performed services for Air France worth £5,934 but it owed other airline members of IATA £50,725; liquidator of British Eagle claimed to recover the £5,934 directly from Air France.
(i) Did British Eagle’s property include a right to sue Air France? (ii) If so did the IATA rule which purported to prevent British Eagle forcing that right except via the clearing house contravene pari passu distribution?
Decision: (i) yes; (ii) yes
Rule: A clause is void if it has the effect of removing property from the insolvent’s estate that would otherwise be available for creditors
B Mullan & Sons Contractors Ltd v Ross [1996] NI 618 (Northern Ireland Court of Appeal)
Rule: Irish case saw direct payment clauses found void following British Eagle
International Air Transport Association v Ansett Australia Holdings Ltd [2008] BPIR 57 (High Court of Australia)
Case: IATA rules reg 9(1) now provides -
“With respect to transactions between members of the Clearing House which are subject to clearance through the Clearing Hosue as provided in Regulations 10 and 11…, no liability for payment and no right of action to recover payment shall accrue between members of the Clearing House. In Lieu thereof members shall have liabilities to the Clearing House for balances due by them resulting form a clearance of rights of action against the Clearing House for balances in their favour resulting from a clearance and collected by the Clearing House from debtor members in such clearance.”
Rule: High Court of Australia accepts new IATA rules as valid
