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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. 


For further information on this topic please contact Mr. Soteris Pittas at SOTERIS PITTAS & CO LLC, by telephone (+357 25 028460) or by fax (+357 25 028461) or by e-mail (spittas@pittaslegal.com)

 

The statements contained in this publication are not legal opinions and readers should not act on the basis of such statements without first consulting a lawyer.