Manning & Ors v AIG Europe (UK) Ltd & Ors

Factual and Procedural Background

This case concerns legal and construction issues arising from the collapse and liquidation of the Save group, a corporate group primarily engaged in petrol retailing. The parent company, referred to as Group, is in compulsory liquidation. One key subsidiary, Save Service Stations Ltd (referred to as Stations), is in creditors' voluntary liquidation and has changed its name to SSSL Realisations (2002) Ltd. AIG Europe (UK) Ltd (referred to as AIG) is a creditor of both Group and Stations, as well as other subsidiaries within the group. The liquidators of Stations also act for other subsidiaries, which have agreed to be bound by the outcome without being parties to the proceedings.

The Save group operated about 400 petrol stations, trading petrol and related products. Group purchased petrol from suppliers and sold it to Stations, which then retailed it to customers. Group managed bank borrowing for the group and lent funds to subsidiaries, creating substantial inter-company debts, particularly Stations' debt to Group. Stations owned the retail premises and most fixed assets.

Group incurred liabilities to Her Majesty's Customs & Excise for duty on petrol supply, which could be deferred by providing bonds secured by indemnities. AIG entered into such a bond and a deed of indemnity (the "Deed") dated 30 September 1997 with Group, Stations, and other subsidiaries. The issues concern the effect of this Deed.

Administration orders were made for Group and its subsidiaries in February 2001. Stations and other subsidiaries entered creditors' voluntary liquidation in May 2002, with Group wound up compulsorily shortly after. The business and assets were sold for approximately £54.5 million, mostly attributed to Stations' assets. Stations' liquidators have paid an initial dividend to creditors and hold substantial funds for further distribution. Group's main asset is the inter-company debt owed by Stations, approximately £127 million. AIG is owed nearly £10 million under the Deed from Group, Stations, and other subsidiaries. Stations also owes other creditors, including banks and trade creditors.

AIG contends that under the Deed, Stations' debt to Group and other subsidiaries is subordinated to AIG's debt, preventing payment on inter-company debts until AIG is paid in full. This subordination would prioritize AIG, banks, and trade creditors in Stations' liquidation, reducing dividends available to Group and thus to its creditors, including fuel suppliers. Group's liquidators seek to avoid this effect, arguing the Deed does not have that effect or is ineffective or avoidable in law.

Two applications are before the court, by the liquidators of Stations and Group respectively. The main dispute is between AIG and Group. The parties agreed the issues to be determined, which were set out in a court order. Extensive skeleton arguments were submitted, and a three-day hearing was held. Prior negotiations failed to resolve the dispute. The liquidators seek directions to proceed with the winding-up processes.

Legal Issues Presented

1. Construction and effect of clauses 8.2 and 8.3 of the Deed of Indemnity concerning subordination of inter-company debts.
2. Whether clause 8.2 infringes the pari passu principle of insolvency law and is void on public policy grounds.
3. Whether clauses 8.2 and/or 8.3 create a charge over book debts requiring registration under the Companies Act 1985.
4. Whether clause 8.3 constitutes a penalty and is void.
5. Whether the liquidators of Group can disclaim the Deed as onerous property under section 178 of the Insolvency Act 1986.
6. Whether Group should prove for its inter-company debt in Stations' liquidation despite the Deed's restrictions.
7. Whether AIG is entitled to an injunction restraining Group from proving in Stations' liquidation and breaching the Deed.

Arguments of the Parties

AIG's Arguments

• Clause 8.2 of the Deed is clear and comprehensive, subordinating all debts owed between indemnitors to AIG's debt.
• No Indemnitor may claim, rank, prove, or vote as a creditor in competition with AIG until AIG is paid in full.
• Clause 8.3 requires any payments received in breach of clause 8.2 to be held on trust and paid over to AIG.
• AIG is entitled to an injunction restraining Group from breaching the negative obligation not to prove in Stations' liquidation as damages would be inadequate.
• The Deed does not create a charge over book debts requiring registration.

Group's Arguments

• Clauses 8.2 and 8.3 should be read as limited to payments or claims made under the Deed, not all inter-company debts.
• Clause 6.5 requires obligations to AIG to rank pari passu with other unsecured creditors, inconsistent with broad subordination.
• The subordination in the Deed infringes the pari passu rule, especially considering Group's creditors who would be prejudiced.
• The Deed or its effects could be disclaimed as onerous property under section 178 of the Insolvency Act 1986.
• If Group proves in Stations' liquidation in breach of the Deed, damages would be an adequate remedy and would rank as an expense of the liquidation.
• Clause 8.3 creates a charge over book debts which is void for non-registration under the Companies Act 1985.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Horne v. Chester & Fein Property Developments Pty Ltd (1987) 5 ACLC 245	Validity of subordinated debt and priorities agreements between creditors not prejudicing others.	Supported the validity of the subordination agreement between parties; the court found such agreements binding even if non-parties are affected.
Re British & Commonwealth Holdings plc (No 3) [1992] 1 WLR 672	Subordination of loan stock holders' rights in insolvency.	Confirmed that contractual subordination is effective in insolvency.
Re Maxwell Communications Corporation plc [1993] 1 WLR 1402	Contractual subordination of debts does not breach pari passu rule and is not void by insolvency legislation.	Held that a creditor can validly waive proving for debt or agree subordination.
British Eagle International Airlines Ltd v. Cie Nationale Air France [1975] 1 WLR 758	Insolvency law prohibits contractual arrangements that defeat pari passu distribution among creditors.	Distinguished the case; the present subordination does not divert assets but suppresses claims, thus not violating pari passu.
Ex parte Mackay (1873) 8 Ch App 643	Contracts cannot provide for distribution of insolvent's estate contrary to insolvency law.	Referenced in analysis of pari passu principle and subordination validity.
Re Bond Worth Ltd [1980] Ch 228	Legal nature of charges and proprietary rights.	Used to determine that clause 8.2 does not create a charge.
Welsh Development Agency v. Export Finance Co Ltd [1992] BCLC 148	Analysis of charges and security interests.	Supported the conclusion that clause 8.2 does not create a charge.
Shipley v. Marshall (1863) 14 CB(NS) 566	Definition of book debts for registration purposes.	Applied to determine whether clauses create a charge over book debts.
Official Receiver v. Tailby (1886) 18 QBD 25	Definition and treatment of book debts.	Considered in context of registration requirements.
Agnew v. Commissioners of Inland Revenue [2001] UKPC 28, [2001] 2 AC 710	Relationship between charges over debts and their proceeds.	Distinguished; allowed separation of charges over proceeds from charges over debts.
Re Celtic Extraction Ltd [2001] Ch 475	Scope of property and disclaimer powers under insolvency law.	Guided analysis of whether the Deed could be disclaimed as onerous property.
Hindcastle Ltd v. Barbara Attenborough Ltd [1997] AC 70	Purpose of disclaimer provisions to facilitate winding-up.	Referenced in the policy discussion on disclaimer.
Re Park Air Services Ltd [2000] 2 AC 172	Disclaimer of onerous property in voluntary liquidation.	Supported the approach to disclaimer powers and their limits.
Transmetro Corporation Ltd v. Real Investments Pty Ltd (1999) 17 ACLC 1314	Principles for determining unprofitable contracts under Australian law.	Used as a persuasive guide on whether the Deed is an unprofitable contract under UK law.
Doherty v. Allman (1873) 3 App Cas 709	Presumption in favour of granting injunctions to enforce negative contractual obligations.	Supported the conclusion that an injunction restraining breach of the Deed would be granted.
Rainbow Estates v. Tokenhold [1999] Ch 64	Factors for granting injunctions versus damages for breach of contract.	Applied in assessing whether damages would be adequate remedy.
Jaggard v. Sawyer [1995] 1 WLR 798	Damages as cost of obtaining rights akin to a ransom strip analogy.	Considered and distinguished in the context of damages as expenses of liquidation.

Court's Reasoning and Analysis

The court began by examining the relevant provisions of the Deed, particularly clauses 8.2 and 8.3, which impose subordination of indemnitors' rights until AIG is paid in full and require payments received in breach of this subordination to be held on trust for AIG.

The court found that clause 8.2 is not limited to debts arising under the Deed but applies generally to all debts owed by one indemnitor to another, preventing claims, voting, or receiving payments in competition with AIG until AIG's debt is fully satisfied. Clause 8.3 imposes a trust and payment obligation limited to sums necessary to satisfy AIG's debt in full.

Regarding the pari passu principle, the court distinguished the present case from British Eagle and similar cases, holding that the subordination agreement does not divert assets but suppresses claims by agreement among the parties. The court held that the subordination is valid and does not violate insolvency law or public policy.

The court rejected the argument that clauses 8.2 or 8.3 create a charge requiring registration. Clause 8.2 does not create any proprietary right, and clause 8.3's trust obligation is limited to sums necessary to pay AIG, thus not constituting a charge over book debts.

The court considered whether the Deed could be disclaimed as onerous property under section 178 of the Insolvency Act 1986. Applying English and Australian authorities, it held that the Deed is not an unprofitable contract giving rise to prospective liabilities or continuing financial obligations. The disadvantage to Group is part of the price for the benefit already received, so disclaimer is not available.

On whether Group should prove for its inter-company debt in Stations' liquidation, the court found that doing so would breach the Deed and be futile since any dividend would be held on trust for AIG under clause 8.3. Damages for breach would not be an expense of liquidation and thus would not be payable in priority, making them an inadequate remedy. The court would grant an injunction restraining Group from proving in breach of the Deed.

Finally, the court concluded that Stations is not contractually obliged to refuse proof from Group, but since Group should not prove in breach of the Deed, this issue is largely academic.

Holding and Implications

Holding: The court held that clauses 8.2 and 8.3 of the Deed validly subordinate Group's inter-company debt to AIG's debt, preventing Group from proving for that debt in Stations' liquidation until AIG is paid in full. The Deed is not void on insolvency or public policy grounds, does not create a registrable charge over book debts, and cannot be disclaimed as onerous property. Group should not prove in breach of the Deed, and the court would grant an injunction to enforce this obligation.

Implications: The decision confirms the validity of contractual subordination agreements among related companies in insolvency, even where such subordination adversely affects a creditor's own creditors. It clarifies that such subordination does not breach the pari passu principle if agreed by the relevant parties. The ruling also restricts the ability of insolvent companies to disclaim such agreements as onerous property. The direct effect is that Group's liquidators must comply with the Deed, limiting distributions in the liquidation of Stations and consequently affecting Group's creditors. No new precedent altering insolvency principles was established.