The Anti-Deprivation Rule
It is not uncommon to see provisions in contracts which say that if one of the parties declares bankruptcy then the other party suffers some consequence. These provisions can be invalid by virtue of the Anti-Deprivation Rule. The Supreme Court of Canada looked at this issue in the recent case of Chandos Construction Ltd. v. Deloitte Restructuring Inc., 2020 SCC 25.
The court at paragraph 31 explained:
As Bramalea described, the anti-deprivation rule renders void contractual provisions that, upon insolvency, remove value that would otherwise have been available to an insolvent person’s creditors from their reach. This test has two parts: first, the relevant clause must be triggered by an event of insolvency or bankruptcy; and second, the effect of the clause must be to remove value from the insolvent’s estate. This has been rightly called an effects-based test.
We have come across similar provisions in documents ranging from Shareholder Agreements to construction contracts. Contracting parties are advised that these provisions may be of no force or effect.
If you would like assistance reviewing or revising your contracts in light of this case, please feel free to contact us.
The information contained in this article is not legal advice. No solicitor client relationship is formed through this article. The reader is encouraged to retain counsel for advice in these matters.