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	England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Manning & Ors v AIG Europe (UK) Ltd & Ors [2004] EWHC 1760 (Ch) (27 July 2004) URL: http://www.bailii.org/ew/cases/EWHC/Ch/2004/1760.html Cite as: [2004] EWHC 1760 (Ch)

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IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
COMPANIES COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		27 July 2004

Mr Justice Lloyd:

1. This case raises issues of construction and law arising from the collapse and liquidation of the Save group. Three parties are interested. Save Group plc was the parent of the group. It is in compulsory liquidation. I will refer to it as Group. It had a number of subsidiaries, of which the most relevant for present purposes was called Save Service Stations Ltd. It is in creditors' voluntary liquidation, and has changed its name to SSSL Realisations (2002) Ltd. I will call it Stations. The third interested party is AIG Europe (UK) Ltd, which is a creditor of both Group and Stations, as well as of other subsidiaries of the Save group. I will refer to it as AIG. The same persons are liquidators of other subsidiaries as are of Stations. All the other relevant subsidiaries have agreed to be bound by the result of this case without being made parties.
2. The Save group traded primarily as retailers of petrol, and had some 400 or so petrol stations. The trading pattern was that Group bought petrol and related products from suppliers, and sold it on to Stations who sold it to retail customers. Group was also in charge of bank borrowing for the whole Save group, and lent on to subsidiaries such funds as were necessary for their trading purposes. There were, therefore, substantial inter-company debts, above all on the part of Stations to Group for money borrowed and lent on to Stations, and for petrol products bought by Group and sold on to Stations. Stations owned the premises from which retail trading took place, and most other fixed assets used in the retail business.
3. The supply of petrol to Group gave rise to liabilities to Her Majesty's Customs & Excise for duty. It is possible to defer liability to pay the duty by providing a bond to the Customs & Excise to secure payment. AIG and members of the group of which it forms part are willing to enter into such bonds. As a condition of that transaction they require indemnities from the companies on whose behalf they provide the bonds. AIG (or another member of its group – it matters not which and I will treat AIG as if it were the only relevant party) entered into such a bond on behalf of the Save group. AIG also entered into a deed of indemnity on 30 September 1997 with 6 members of the Save group, including Group itself, the parent, and Stations. The issues I have to decide relate to the effect of that deed, which I will call the Deed.
4. Administration orders were made in relation to Group and each of its subsidiaries on 28 February 2001. Stations and the other subsidiaries went into creditors' voluntary liquidation on 8 May 2002. Group was wound up compulsorily on 9 May 2002. The administrators had sold the business and assets of the entire Save group for some £54.5 million. By far the largest proportion of that represented the property and other fixed assets owned by Stations, and almost £53.5 million of the price was attributed to Stations. When Stations' liquidators were appointed they received about £50.5 million from the administrators. They have paid a first dividend of 18p to those creditors whose debts are undisputed, and they hold some £39 million for distribution, including some in a trust account for preferential creditors. Group's main asset is the inter-company debt owed to it by Stations, of the order of £127 million. Stations also owes other subsidiaries about £38 million. AIG was owed almost £10 million. Under the Deed it is a creditor for the same amount in respect of each of Stations, Group and several other subsidiaries. Stations has other creditors, including banks for some £60 million, and trade creditors for some £6 million. The banks are creditors of each relevant member of the group for the same amount. Fuel suppliers have claims against Group for £27 million, and there are some other trade creditors of Group, of about £100,000.
5. AIG contends that, by virtue of the Deed, Station's debt to Group (and to any other relevant subsidiary) is subordinated to that owed to AIG, so that nothing can be paid on account of those inter-company debts unless and until AIG has been paid in full. This would have the effect that the inter-company debt is also subordinated to that of all other ordinary creditors, including the banks and trade creditors. The latter, therefore, would obtain a larger dividend in the liquidation of Stations because they do not suffer competition from the inter-company debt. There is not enough to pay AIG and the other non-subordinated debt in full, so the inter-company debt will remain unpaid. In turn that will mean that there is very little available for distribution in the liquidation of Group to its creditors, such as the fuel suppliers.
6. Broadly, if AIG is right, Group and the other subsidiaries will get nothing out of Stations, and the competition for the assets in that liquidation will be between AIG, the banks and Stations' trade creditors, all of whom will therefore do much better because of the exclusion of the inter-company debts of £165 million. There will be no dividend in the liquidation of Group, so the Fuel suppliers and Group's trade creditors will get nothing, and although AIG and the banks will also get nothing out of the liquidation of Group, they will have done much better through Stations.
7. In those circumstances the liquidators of Group wish to avoid the Deed having that effect, and they therefore contend that, properly understood, it does not, and moreover that if it does as a matter of construction it is not effective in law, or its effect can be avoided in one of a number of ways. Those are the issues that I have to decide.
8. There are two applications before the court, one by the liquidators of Stations and the other by the liquidators of Group. In substance almost all of the argument lay between AIG and Group. The parties were able to agree on what the issues were, and set them out in a document which was the subject of an order by Peter Smith J directing those issues to be determined. The respective contentions were set out in full skeleton arguments, which, helpfully, were directed to be served sequentially. As often happens the process of arguing the case led to some refinements of the formulation of the issues. Essentially I will follow the eleven issues as originally agreed. In support of their arguments on the various points Counsel deployed a large array of authorities, but they made their submissions in an admirably succinct and focussed way, so that all the issues could be argued fully in the course of the three days allowed for the hearing.
9. Before these proceedings were issued, there were lengthy dealings between the parties in the hope of resolving the issues by agreement. These were unsuccessful. The liquidators of Stations issued their application on 30 January 2004 in order to have the issues resolved without further delay, in a way that would be binding on all the relevant parties, so as to be able then to proceed with the administration of the winding-up. If it is established that the inter-company debts cannot in practice be proved for, it will be unnecessary to investigate the correct amount of the debt. AIG threatened to apply for an injunction to restrain Group's liquidators from putting in a proof in the liquidation of Stations. Stations' liquidators were anxious to avoid delay to their winding-up, which might have resulted from such an application.
10. Group's liquidators issued their application on 13 February 2004, partly in order to ensure that the issues were resolved in a way binding on those interested in both liquidations. Both they and the liquidators of Stations have asked the court to give them the appropriate directions as to the course they should follow.
11. AIG contends that, if it is right about the effect of the Deed, it is entitled, if necessary, to an injunction to restrain a breach by Group of its negative obligations under the deed, and that damages would not be an adequate remedy. It has not issued an application for such an injunction, but the matter has, by consent, been ordered to proceed as if such an application had been issued.

The Deed of Indemnity

12. I must first set out the relevant provisions of the Deed. It begins with a recital as follows:

"the Surety [AIG] has agreed to issue or execute Bonds [in favour of the Commissioners of Customs and Excise] …. on behalf of the Indemnitors for good and valuable consideration and the Indemnitors have agreed to indemnify [AIG] and otherwise to perform the agreements and obligations set out below"

13. Clause 1 sets out definitions which I do not need to cite here, but one to which I will refer later is of "Permitted Security Interest". The fundamental provision is clause 2, headed Indemnity, as follows:

"The Indemnitors shall without limiting the obligations of the Indemnitors to make payment to the Surety on demand under clause 3, indemnify and keep the Surety indemnified from and against all claims, liabilities, costs, expenses, damages and/or losses (including loss of interest) incurred by the Surety under or by virtue of Bonds …"

14. Clause 3 is headed Demands for payment. I will quote the material parts of clauses 3.1 and 3.3:

"3.1 Reimbursement or Payment of Surety on Demand

If the Surety shall receive any demand for payment from or make any payment to the Commissioners [i.e. of Customs and Excise] under or in respect of any Bond the Indemnitors shall pay or repay the full amount thereof to the Surety forthwith upon written demand ... stating that such sum has been so demanded or that such payment has been made …"

"3.3 No Set-offs or Counterclaims

Any amount due to the Surety under this deed shall be paid in full without any deduction counterclaim or set off whether arising out of any claim for payments or repayment by the Indemnitors the Principals or any of them from or against the Commissioners, any other government department, the Surety or any other person in respect of the Charges or otherwise howsoever."

15. Some reliance was placed on provisions in clause 6 which I quote:

"INDEMNITORS' COVENANTS

The Indemnitors covenant with the Surety as follows: …"

"6.2 Performance of Obligations under the Facility Letter

that each of the Indemnitors shall … become bound jointly and severally by all the terms conditions and provisions of the Facility Letter and shall observe discharge and perform all the duties and obligations set out therein."

"6.5 Ranking of Claims

the Indemnitors shall procure that all obligations and liabilities to the Surety under this deed shall at all times rank equally and rateably (pari passu) in point of priority with all other present and future obligations and liabilities of the Indemnitors (including without limitation obligations and liabilities arising under any agreement for the provision of term loan overdraft or other banking facilities or any financial facilities or accommodation of any description provided to the Indemnitors from time to time) save for those liabilities which are

i. secured by Permitted Security Interests, or

ii. mandatorily preferred by law applicable to companies generally;"

16. The critical clauses are 8.2 and 8.3, under the general heading (for clause 8 as a whole) of "Enforcement of Surety's Rights and Non-Competition", as follows (the somewhat eccentric punctuation is in the original):

"8.2 Postponement of Indemnitors' Rights

Until all amounts which may be or become payable by the Indemnitors to the Surety under this deed have been irrevocably paid in full no Indemnitor shall after a claim has been made by the Surety hereunder or by virtue of any payment made by it under this deed:

(a) be subrogated to any rights, security, cash cover or other monies received on account of that Indemnitor's liability hereunder.

(b) claim rank prove or vote as a creditor of any Indemnitor or its estate in competition with the Surety: or

(c) receive, claim or have the benefit of any payment distribution or security from or on account of any Indemnitor or exercise any right of set-off as against any Indemnitor.

8.3 Declaration of Trust

Each Indemnitor shall hold in trust for and forthwith pay or transfer to the Surety:

(a) any payment distribution benefit or security received by it contrary to clause 8.2 and

(b) following any claim upon or payment by the Surety under or in respect of a Bond any payment or repayment received by it from the Commissioners or any other person in respect of the Charges or in respect of any overpayment or over-declaration of Value Added Tax."

17. The reference in clause 8.2(a) to cash cover is explained by clause 4 which sets out an obligation of the Indemnitors to provide cash cover for their liabilities, on demand by AIG.
18. By clause 9, the liability of the Indemnitors to AIG is agreed to be as principal debtors, and to be both joint and several.

Subordinated debt

19. The purpose of clause 8.2 is to ensure that AIG's debt ranks in priority to debts owed by any of the Indemnitors to any other. There is a dispute as to whether it applies to all such debts or only to some, and I will come to that, but Counsel made some general submissions about subordinated debt, and it is convenient to address the general points first.
20. Issues of priority only matter if the debtor is insolvent. In an insolvency, whether individual or corporate, and leaving aside secured debts, the order is prescribed by legislation, which gives priority to, for example, costs and expenses of the insolvency, and to certain preferential debts. Otherwise, the general rule is that all debts are to be treated equally, with rateable distribution of the available funds between all creditors: see the Insolvency Act 1986, section 107, for a voluntary winding-up and the Insolvency Rules 1986, rule 4.181, for a compulsory winding-up. It is, however, established that, by contract, one creditor's rights can be subordinated to those of another or others, and this is a common feature of commercial dealings. It has a particular relevance to the capital adequacy of banks and other credit institutions under the regulatory regime applying to them, but it is used more widely.
21. There is also a separate rule, applying to guarantors, whereby, if a guarantor has paid part, but not all, of the guaranteed debt to the creditor, it cannot claim in the insolvency of the principal debtor until the creditor has been paid in full. That principle applies to a case such as the present, because if an amount were paid by one of the Indemnitors to AIG in respect of the liability under clauses 2 and 3 of the Deed, in principle the payer would be entitled to be subrogated to AIG's rights against the other Indemnitors but, unless AIG has been paid in full, it still has its own remaining claims against the Indemnitors. It would wish to ensure that it does not face competition from the paying Indemnitor in its claim against the other Indemnitors. That is an element in the present transaction, but it is not important. What AIG wishes to ensure is that no Indemnitor can receive anything from another Indemnitor's assets unless and until AIG has been paid in full.
22. The validity of subordinated debt arrangements has been considered in two English cases and a number of Commonwealth cases. The earliest case I need to consider is Horne v. Chester & Fein Property Developments Pty Ltd (1987) 5 ACLC 245, a decision of Southwell J in the Supreme Court of Victoria. In that case three persons had entered into an agreement in relation to a company which was not a party to the agreement, and may not even have been incorporated by then. The agreement provided that the three were to advance to the company, in equal amounts, the money needed for its establishment, and these loans were to rank equally, but that if any of the three lent further money to the company afterwards, those additional loans were to be repaid in full before the other loans made by any of the three. Two of them did make further loans. The company went into insolvent liquidation, and the question arose whether the agreement for prior repayment of the further loans was valid. There were other creditors of the company, and it was accepted that they were to be paid pari passu with the creditors in respect of the further loans. The judge considered a number of cases, including British Eagle, to which I will refer later. He held that the agreement was valid and effective. He said that the principle of insolvency law that the whole of the debtor's estate should be available for distribution to all creditors, and that no one creditor or group of creditors can lawfully contract in such a manner as to defeat other creditors not party to the contract, did not mean that effect could and should not be given to an agreement between parties which does not adversely affect the entitlement of persons who are not parties, such as he was considering in that case.
23. In Re British & Commonwealth Holdings plc (No 3) [1992] 1 WLR 672, the first of two English decisions about subordinated debt, both decided by Vinelott J, the judge had to consider the rights of the holders of convertible subordinated unsecured loan stock as compared with those of other creditors of the company, in relation to a proposal for a scheme of arrangement under section 425 of the Companies Act 1985. The dispute was between the administrators on the one hand and the trustee of the loan stock on the other. The judge held that the rights of the loan stock holders in a winding-up would be subordinated to those of other creditors. It was not contended that the subordination was ineffective in a winding-up.
24. The following year, in Re Maxwell Communications Corporation plc [1993] 1 WLR 1402 the judge had to decide a similar question in a case where the contractual subordination was not supported, as it had been in the earlier case, by trust provisions. It was argued that the pari passu distribution of assets among unsecured creditors was a general rule of insolvency law from which it was not possible to contract out, even to one's own disadvantage, particularly by analogy with cases on set-off in insolvency. The judge decided that this was not the law. He said that there was no reason why a particular creditor should not waive his right to prove altogether, or save to the extent of assets remaining after another creditor is satisfied, and that he could do this either in the insolvency or in advance of it. He considered the British Eagle case, and other authorities, and held that they did not force him to hold that a contract between a company and a creditor, providing for the debt due to the creditor to be subordinated in the insolvent winding-up of the company to other unsecured debt, is rendered void by the insolvency legislation (see p. 1416F). He held that such an agreement could be valid, and that in the case before him it was.
25. Mr Randall Q.C., appearing for the liquidators of Group, identified three distinct types of transaction, which he said could have different consequences. The true subordinated debt, he submitted, is one where the terms on which the debt is incurred, by agreement between the creditor and the debtor, provide for repayment to be subordinated to other payments to be made by the debtor, as in the two cases before Vinelott J. He contrasted this with a priorities agreement, namely a contract between two or more creditors of the same debtor by which they agree to alter the priority in which they would otherwise receive payment as between themselves. He submitted that in the case of a priorities agreement, persons who are not parties to the contract and have not agreed to its terms should not be prejudiced by it, especially as creditors in a later insolvency. He characterised this as no more than a contractual obligation binding on the particular parties to the contract. Subject to the question whether any security or other proprietary right is conferred over a particular asset of the debtor, this is a fair comment, but it does not seem to me that it leads to any particular consequence or conclusion relevant to the debate. He identified a third type of transaction, a trust arrangement, whereby one creditor, A, agrees to hold on trust moneys received from a common debtor for the purpose of paying or securing payment of another creditor, B. He said that there was nothing inherently wrong with such a transaction, which does confer proprietary rights, but that if A later became insolvent, the arrangement was likely to be a charge over its book debts, and accordingly void against other creditors unless registered.
26. Another distinction can also be drawn between two different types of subordinated debt agreement. There are those by which the debts owed to one creditor or group of creditors are subordinated to those of others, leaving all others to compete equally between themselves, pari passu. The alternative approach, sometimes called "turnover subordination", is one whereby one creditor agrees with another to hold on trust for the other all dividends or other payments received in respect of his own debt (or at any rate the amount required to pay the other creditor in full), unless and until the other is paid in full. The latter approach would only arise in the context of an agreement between creditors, whereas the former could apply either in an agreement between creditors or in the terms of the issue of subordinated debt as between debtor and creditor. As regards the interest of the creditor seeking to be preferred over another, depending on the likely competition from other creditors not party to the agreement, the latter may well be a more beneficial arrangement than the former, because the former limits the competition, but gives the advantage of that to all the creditors who are not subordinated.
27. Professor Goode, in Commercial Law, 2^nd ed. at page 665, and in Legal Problems of Credit and Security, 3^rd ed. at page 316, observes that the former type of arrangement is not in the best interests of the non-subordinated creditor, because the latter is so much more advantageous. That point is well illustrated by the present case. The agreement is of the former kind and, if effective, it means that AIG does not have to compete with Group or other creditors within the Save group, but it still has to compete with the banks and trade creditors. If Group were allowed to prove, but required to hold on trust for AIG its dividends received, up to the amount required to pay AIG in full, AIG would receive a great deal more than it will on its own contentions, and in practice would probably be paid in full. Clause 8.3 is a clause of a type which, by itself, could give AIG the benefit of the latter approach, but it is ancillary to clause 8.2 which adopts the former approach.
28. Going back to Mr Randall's three categories, B&C and Maxwell were both subordinated debt cases, whereas Horne was concerned with a priorities agreement. Mr Randall's proposition about a priorities agreement was not tested in Horne because there had not been a subsequent insolvency. Chester & Fein Property Developments Pty Ltd, the creditor who was to be subordinated, was not insolvent. Southwell J decided the case specifically on the basis that the agreement between the three creditors did not and could not prejudice any other creditor of the insolvent company, Gladecroft Pty Ltd.
29. Mr Randall's submission is that the relevant agreement in the present case is a priorities agreement, and that it does adversely affect other creditors, but the creditors whom it adversely affects are the creditors of Group. It seems to me that this submission confuses the position under the two distinct liquidations that I have to consider. But before dealing with that in principle, I must consider the arguments of construction.

The construction of clause 8.2 and 8.3

30. For AIG Mr Snowden Q.C. submits that clause 8.2 is clear and comprehensive. It can arise in two cases: either a claim has been made by AIG for payment under clause 3, or an Indemnitor has made a payment under the Deed, which means a payment to AIG. In the latter case, paragraph (a) is relevant, because it is only after such a payment that any question of subrogation could arise. Paragraphs (b) and (c), by contrast, are not limited to the case of a payment by an Indemnitor to AIG. They can be relevant when AIG has made a claim for payment under clause 3. He submits that in such a case (which is the present case) no Indemnitor may claim, rank, prove or vote as a creditor of any other Indemnitor in competition with AIG until all amounts payable by the Indemnitors to AIG have been paid in full. That is entirely general in its terms, and does not just prevent an Indemnitor from claiming in respect of any payment that it has made to AIG (though it would of course cover that) but it also precludes any claim in respect of any debt whatsoever. Similarly, paragraph (c) is quite general, and prohibits an Indemnitor from receiving or claiming any payment from or on account of any other Indemnitor in whatever way it may arise.
31. Mr Randall submits that paragraphs (b) and (c) ought to be read in the light of (a) and as limited to payments made, or claims for payment made, under the Deed, rather than as extending to all payments of any kind. He submits that clause 6.5 is a relevant part of the context, and shows that the rights of unsecured non-preferential creditors were to be pari passu, which would be inconsistent with reading clause 8.2 as providing for subordination of all debt owed by one Indemnitor to others. That clause requires the Indemnitors to procure that obligations to AIG rank equally and rateably, pari passu, with all other obligations of the Indemnitor, other than preferential debts and Permitted Security Interests, which are defined in a very limited way.
32. I agree that, reading clause 6.5, one would not expect to find a subordinated debt provision later in the Deed. But clause 8.2 plainly is a provision for the subordination of debt. In the light of this, clause 6.5 has to be understood as limited to ensuring that the obligations to AIG are not themselves subordinated in any way. In practice they could not be, without AIG's agreement, except by the giving of security. The main purpose of clause 6.5 is therefore as a negative pledge provision.
33. In my judgment, clause 8.2 is not limited, on its true construction, to the indemnified debt. Paragraphs (b) and (c) apply to any debt owed by a relevant Indemnitor to any other. The words "in competition" in (b) do not have the effect of limiting their application, and nor does clause 6.5. To read the clause as limited to the indemnified debt would largely deprive paragraphs (b) and (c) of content.
34. A separate question was also argued, namely whether the clause carries with it, by implication, a negative obligation on each Indemnitor not to admit another Indemnitor to proof, where it is a breach of clause 8.2(b) for the latter Indemnitor to prove for the debt. Mr Snowden argued that an implication of this kind is required. Mr Randall, and Mr Mortimore Q.C. for the Stations liquidators, argued to the contrary. I agree with them. In particular, it seems to me that paragraph (c), which deals with payments received, and also clause 8.3 which deals with payments received in breach of clause 8.2, provide the sanction under the Deed for a failure to comply with clause 8.2(b). This seems to me to undermine whatever case there might otherwise be for an implied term not to admit such claims to proof.
35. Turning to clause 8.3, which is ancillary to 8.2, there are two pairs of elements to it. It applies under paragraph (a) to any payment distribution benefit or security received by an Indemnitor in breach of clause 8.2. It also applies under paragraph (b) to a payment or repayment received by an Indemnitor from the Commissioners or anyone else as regards the relevant duties and taxes, a situation which has not arisen in the present case. It requires the Indemnitor in question to do two things: first to hold the relevant payment in trust for AIG, and secondly forthwith to pay it or transfer it to AIG.
36. The word "benefit" in paragraph (a) is odd, and probably a slip, but this does not matter for present purposes. What does matter is "payment". Mr Randall submits that, if clause 8.2 applies to all debts, as I have held, then clause 8.3 applies to payments in respect of all debts, and requires any such payment to be held on trust for AIG and to be paid over to AIG. These might exceed the amount of the debt due to AIG. Accordingly, he says, this is a right by way of security, and in fact a charge. He then goes on to say that it is a charge on book debts of the relevant Indemnitor, and void because it is not registered under Companies Act 1985 section 395.
37. Both Mr Randall and Mr Snowden submit that the obligation to pay, under clause 8.3, is limited to the amounts due to AIG. That is a sensible reading, since AIG would have no legitimate interest in receiving more money than is due to it overall. Mr Randall submits that the trust, on the other hand, is not so limited, whereas Mr Snowden submits that both the trust and the payment obligation relate to the same sums, being limited to the sums due to AIG. It seems to me that the natural reading is to take the trust provision and the payment obligation as applying to the same subject matter, so that the payments which an Indemnitor has to pay over to AIG are limited to those necessary to pay AIG in full what is owed to it. I reject the argument that this gives no additional content to the trust obligation. That covers the position after any relevant receipt by an Indemnitor and until it is paid over.
38. Mr Randall submitted that there could be situations in which clause 8.3 could not work on this limited basis. Suppose that, at a relevant time, when the debt to AIG exceeds £5 million, Stations pays to Group £3 million on account of its liability for the cost of fuel paid for by Group. On the wide reading of clause 8.2(c) that payment is received in breach of clause 8.2, and therefore is caught by clause 8.3. Suppose that, mindful of this obligation, Group puts the £3 million into a trust account but does not immediately pay it over to AIG, and that, after that, another subsidiary pays to AIG all but £1 million of the sum owed to it. At that point AIG needs a further £1 million for which it is entitled to look to the trust account, but it does not need the whole £3 million which is in that account. Mr Randall submitted that there is nothing in clause 8.3 to free the remaining £2 million from the trust. He accepts that, once AIG has been paid in full, no further sums paid by one Indemnitor to another would be caught by clause 8.3, because no sums paid at that stage are received in breach of clause 8.2. But he says that, once a trust account has been constituted under clause 8.3, there is nothing in the clause to free the subject of the trust from the trust obligation affecting it. It seems to me that the example is somewhat fanciful and unrealistic. (I should make it clear that it is not quite the same as that put forward by Mr Randall, but it is in essence the same.) But even if it did occur, it seems to me that the trust obligation, which is a continuing obligation, is conditioned and limited by the payment obligation. Since that is limited to what is needed, at any given moment, to pay AIG in full, so the trust obligation is likewise limited.
39. I can therefore now answer questions 1 and 2, which relate to the construction of clauses 8.2 and 8.3.

o On Issue 1, I hold that, as a matter of construction of clause 8.2 of the Deed, the clause prohibits Group from proving for its inter-company debt due from Stations and from receiving a dividend in respect of such debt in the liquidation of Stations at a time when the debt to AIG remains unpaid.

o In relation to Issue 2, I hold that, as a matter of construction of clause 8.3 of the Deed, the obligations thereby imposed on Group (a) to hold payments on trust and (b) to pay or transfer to AIG sums received within the provisions of sub-clauses 8.3(a) and (b), apply only to such sums so received as are necessary and sufficient to pay in full the amount which is owed to AIG.

Is clause 8.2 valid and effective?

40. On that basis I can now turn to Issue 3, which concerns Group's attack on clause 8.2 on the ground that it infringes the pari passu rule as regards distribution in insolvency. I have touched on some of the considerations relevant to this issue already. Mr Randall accepts that there is no breach of the pari passu principle if one considers only the liquidation of Stations. He submits, however, that the effect on the creditors (other than AIG itself) of Group must also be considered and that, viewed in that light, the effect of the Deed is to give up a major asset of Group, to the prejudice of its own creditors.
41. Mr Randall relies strongly on analogy with British Eagle International Airlines Ltd v. Cie Nationale Air France [1975] 1 WLR 758. I must therefore summarise that case. IATA maintained a clearing house system for the monthly settlement of debits and credits arising for services provided by one member for another. No member could claim directly from another for services provided; instead they could claim from IATA the balance due, which was struck after taking into account all credits and debits affecting each member during the month. Both parties were members. When the plaintiff (BE) went into insolvent liquidation, it claimed directly against Air France (AF) the balance in its favour of the sums due for services provided by it to AF over the amount due to AF for services provided the other way during the relevant period, on the basis that other members, to whom on an individual basis it was a net debtor, would have to prove for their debts. A majority of the House of Lords decided, reversing the Court of Appeal and the trial judge, that BE was correct in this approach. The minority, and the courts below, held that there never was a separate debt owed by one member to any other, that the member's only contractual right was to the balance, and that therefore BE's property, divisible between its creditors, did not include a debt owed by AF but rather an amount (if any – in fact it was a net debtor overall) due to it under the clearing system. The majority, whose reasons are in the speech of Lord Cross, considered that each relevant member was to be treated as a creditor or debtor of BE, not merely of the clearing house. They held that, on that basis, to allow any part of the debt owed by AF to BE to be used to satisfy part of a debt owed by BE to another member would give preferential treatment to that other member, and would therefore involve the distribution of BE's assets otherwise than strictly rateably among its creditors. Reference was made to cases such as Ex parte Mackay (1873) 8 Ch App 643 for the proposition that the court will refuse to give effect to provisions in contracts which, if effective, would achieve a distribution of the insolvent's property inconsistent with the principles underlying insolvency legislation, above all that of pari passu distribution. As James LJ said in that case, at page 647:

"in my opinion a man is not allowed, by stipulation with his creditor, to provide for a different distribution of his effects in bankruptcy from that which the law provides."

42. Lord Cross held that the clearing house arrangement constituted a mini-liquidation within the main liquidation, for the benefit of the clearing house members only, and that this was not permissible. It did not, of course, involve the subordination of clearing house creditors to other creditors. Instead it involved their being preferred over other general creditors. To take an oversimplified illustration, if BE was owed £5,000 by AF, but it owed to other IATA creditors £10,000 and to general creditors £5,000, BE was entitled to collect in £5,000 from AF, which would then be available for rateable distribution between the IATA and the general creditors, each receiving on these figures (and ignoring costs) a dividend of one third. If IATA had been right, the sum due from AF would have been used to pay the IATA creditors, so that they would have received, in effect, a dividend of a half, and the general creditors would have received nothing.
43. Mr Randall submits that the present case is analogous, because Group's asset, consisting of the inter-company debt owed to it by Stations, is to be used to pay AIG (and the Banks and Stations' trade creditors) to the exclusion of Group and the other subsidiaries. That is true in a broad economic sense, but it is the effect of the agreement between Group, the subsidiaries and AIG, and in legal terms the preference of other creditors, which results from the alteration of the rules of distribution affecting inter-group creditors, does not involve the diversion of an asset of Group, but rather its suppression by subordination.
44. Mr Randall's submission requires that both Stations, the debtor, and Group, the junior or subordinated creditor, should have become insolvent. He accepts that if the junior creditor were solvent, it would be bound by its agreement to the subordination. That seems to me to introduce an element of conditionality into the argument which cannot be justifiable on analysis. Within the class consisting of all the creditors of Stations, those creditors who are to be subordinated have all agreed to that process, by way of the Deed. In terms of the analysis set out in, for example, Horne, their agreement is valid and binding notwithstanding that their own creditors are not parties to the agreement. In the absence of some vitiating factor under insolvency law which would enable the office-holder to challenge the agreement on some statutory or other basis, it is for a party such as Group to make its own agreements and dispositions, which will be binding on it and on those interested in its assets. Mr Randall submitted that the result in Horne would have been different if the junior creditor in that case had become insolvent by the time the case came before the court. I cannot accept that.
45. In my judgment, the application of the pari passu principle has to be considered separately in relation to each insolvency. As between the creditors of Stations, the subordination, by their agreement, of the debts due to Group and to other members of the Save group does not infringe the principle. It is valid because they have agreed to it, as the junior creditor did in Horne. Nothing turns on the question whether the subordination arises from the initial terms of the transaction creating the debt or from a later agreement, nor on whether the debtor is a party to such an agreement (though in the present case the debtor, Stations, was such a party). Equally, in the liquidation of Group there is no breach of the principle, and the assets which Group's liquidators are able to collect in would, if sufficient, be applied rateably between all its relevant creditors. The fact that Group will not be able to collect in its main asset, namely the inter-company debt, does not interfere with this principle. The situation is therefore quite different from that in British Eagle, or in Ex parte Mackay and other cases of that kind.
46. It has not been suggested that Group's entry into the Deed is vulnerable under any other provision of insolvency law. That being so, it seems to me that creditors claiming in the liquidation of Group are bound by the consequences of Group's agreement just as Group itself and its members would be if it had remained solvent.
47. Accordingly, in answer to Issue 3, I hold that on the construction of clause 8.2 of the Deed which I have held to be correct, Group's assets do not fall to be dealt with in a manner contrary to section 107 of the Insolvency Act 1986 or rule 4.181 of the Insolvency Rules 1986, and accordingly the Deed is not void on grounds of public policy.

Clause 8.3: a penalty?

48. Issue 4 raises the question whether clause 8.3 constituted a penalty provision and is therefore void. On the construction of the clause which I have held to be correct, this question does not arise.

Clauses 8.2 and 8.3: a charge over book debts?

49. Issues 5 and 6 pose the question whether clauses 8.2 or 8.3 or both constitute a charge in favour of AIG, and if so whether it is void as being a charge over book debts and not registered under section 395 of the Companies Act 1985. Clause 8.2 does not create a charge by itself at all. Really the question turns on clause 8.3, but that must be seen in the context of clause 8.2 to which it is ancillary. On my reading of clause 8.3 both the trust obligation and the payment obligation are limited to the sums due to AIG. It follows that neither clause constitutes a charge.
50. Mr Randall submitted that clause 8.2 either creates a proprietary right, which would be a charge and require registration, or it does not bind Group's creditors. I disagree. Clause 8.2 does not create any proprietary right. What it does is to prevent Group, until and unless certain conditions are satisfied, from taking steps to collect in a debt owed to it. Of course, if this is effective, it has the result of putting AIG (but also other creditors) in a better position in the liquidation of Stations. But it does not do so by way of security over an asset belonging to Group. The fact that it achieves a result which is, in some respects, similar to that which would be achieved by a charge is of course relevant, but it cannot be characterised as a charge merely because the effects are in some ways similar. The document must be examined and analysed and its true legal nature ascertained: see Re Bond Worth Ltd [1980] Ch 228, Welsh Development Agency v. Export Finance Co Ltd [1992] BCLC 148. The debt owed to Group subsists but is subject to what are in theory temporary (but may in practice be permanent) constraints on its enforcement. Clause 8.2 does not assign any debt to AIG or appropriate a debt to answer a liability to AIG. If it did, then the whole of the benefit of the debt would be applicable for AIG's benefit, whereas Mr Randall correctly points out that the subordination of the inter-company debt operates just as much for the benefit of creditors not party to the Deed, such as the Banks and the trade creditors of Stations, as it does for AIG.
51. Clause 8.3 does involve the creation of a property right in favour of AIG, in the form of the trust obligation. It is accepted that this would create a charge if, but only if, it is construed as applying to all receipts, rather than to sums received up to the amount owed to AIG. Accordingly, on my reading of the clause it does not create a charge.
52. I heard submissions about whether, even if it was a charge, it was over book debts, so as to require registration because of Companies Act 1985 section 396(1)(e). I will deal with this point briefly. A book debt means, for this purpose, a debt owing to a company connected and arising out of the company's trade and business which is entered, or commonly would be entered, in the ordinary course of business, in well kept books of a trade or business: see Shipley v. Marshall (1863) 14 CB(NS) 566, Official Receiver v. Tailby (1886) 18 QBD 25. Mr Snowden submits that the charge (if any) would be over the sums received by Group, not over the debt in respect of which they were paid. He does not dispute that that debt (for example, to Group for the cost of fuel supplied) would be a book debt of Group, but he points out that clause 8.2(c) and correspondingly clause 8.3(a) only apply when a sum has been received by Group in respect of sums owed by Stations. At that point, there is no debt at all; there is only a sum of cash in the hands of Group, which cannot in any sense be regarded as a book debt.
53. Mr Randall submits that a debt and its proceeds are uniquely intertwined and cannot be separated for these purposes. He cited Agnew v. Commissioners of Inland Revenue [2001] UKPC 28, [2001] 2 AC 710, at paragraph 46, where Lord Millett said:

"Any attempt in the present context to separate the ownership of the debts from the ownership of their proceeds (even if conceptually possible) makes no commercial sense."

54. That decision, however, concerned the converse proposition, that a charge over a debt carried with it inevitably a charge over its proceeds. If it did not, it was worth nothing. I do not question that proposition, but it seems to me that it is possible to create a charge over a sum of money held by a person once it has been paid to him, without necessarily also creating a charge over the debt or other right in respect of which it may come to be paid. In my judgment that is what happened in the present case if, contrary to my view, clause 8.3 does create a charge at all.
55. I therefore answer issues 5 and 6 as follows:

o Issue 5: On the true construction of clause 8.2 of the Deed it does not give AIG any proprietary right over any asset of Group; accordingly that clause does not give rise to a charge, and therefore not to a charge over book debts which, if it were created, would require registration pursuant to section 395 of the Companies Act 1985.

o Issue 6: On the true construction of the Deed, although clause 8.3 does confer on AIG a proprietary right over assets of Group, it does not constitute a charge because it is limited to the amounts required to pay AIG. If it were not so limited it would constitute a charge, but it would not be a charge over book debts, and would therefore not require registration under section 395 of the Companies Act 1985.

Disclaimer

56. On the basis that their other challenges to the Deed have not succeeded, the liquidators of Group next contend that it is open to them to disclaim the Deed as onerous property under section 178 of the Insolvency Act 1986. The consequence would be that AIG, as a person sustaining loss or damage by the disclaimer, would be deemed to be a creditor of Group to the extent of the loss or damage and could prove for that amount: see section 178(6). Clearly that would put it in a much less advantageous position than it would be in if it can insist on the subordination of the inter-company debt. The point is connected, for practical purposes, with a later issue, as to whether the court would enforce by injunction Group's negative obligation not to prove in Station's liquidation, because if it would not, then Group might be liable in damages only, leaving AIG to prove in Group's liquidation for its loss.
57. Mr Randall's submission is that the purpose of disclaimer is to free a company in liquidation from continuing unexecuted onerous obligations, and to enable the liquidator to turn an unprofitable contract into a claim in the liquidation for monetary compensation. Undoubtedly that is the effect of a disclaimer. He says that the nature and cause of the disadvantages imposed on Group as a result of the subordination of the inter-company debt is such that no sufficient reciprocal benefit is conferred on Group, and it is prospectively liable, in an onerous and unprofitable way, to AIG under clauses 8.2(c) and 8.3.
58. Section 178 reads as follows, so far as relevant:

"(2) Subject as follows, the liquidator may, by the giving of the prescribed notice, disclaim any onerous property, and may do so notwithstanding that he has taken possession of it, endeavoured to sell it or otherwise exercised rights of ownership in relation to it.

(3) The following is onerous property for the purposes of this section –

(a) any unprofitable contract, and

(b) any other property of the company which is unsaleable or not readily saleable or is such that it may give rise to a liability to pay money or perform any other onerous act."

59. This provision widens the power to disclaim from that given by the previous law, and in that respect followed recommendations in the Cork Report. Mr Randall's submission, at its most simple, is that the Deed is a contract, it is onerous and it is unprofitable, and accordingly it falls within the terms of section 178(3)(a).
60. He also says it falls within section 178(3)(b), but that is a more difficult submission. "Property" is defined by section 436 of the 1986 Act as including "money, goods, things in action, land and every description of property wherever situated and also obligations and every description of interest, whether present or future or vested or contingent, arising out of or incidental to, property." For present purposes the Deed imposes obligations on Group rather than conferring on it any rights. Although obligations feature in the definition, this is limited to obligations arising out of or incidental to property. Within a definition of property this might seem to be circular, but even taking "property" in that context at its widest, the obligations under the Deed cannot be said to be to do with property in any way. It seems to me that for something to qualify as "property", it must involve some element of benefit or entitlement for the person holding it, which is not true of the Deed as regards Group or any of the other Indemnitors in present circumstances; the Indemnitors have already had the benefit for which they entered into the Deed. Moreover, even if this is wrong and the obligations under the Deed could be regarded as property, it cannot fairly be described as property which is "unsaleable or not readily saleable". In itself that phrase seems to confirm the last proposition, that there must be, potentially at least, some benefit or entitlement arising from the thing in question. Nor can the Deed give rise to a liability to pay money or to perform any other onerous act. It imposes on Group a negative obligation or disability, preventing it from collecting in an asset, rather than a positive obligation to pay money or do anything at all. If the Deed is within the section it must be as an unprofitable contract under sub-section (3)(a).
61. The scope of section 178 has been considered by the Court of Appeal in Re Celtic Extraction Ltd [2001] Ch 475, where the issue concerned a waste management licence granted under the Environmental Protection Act 1990. The Court of Appeal held that such a licence was property within section 436 and section 178(3)(b), and (reversing the judge) that it was capable of being disclaimed despite the provisions of the 1990 Act under which it was granted. At paragraph 26 Sir Andrew Morritt V-C said that the definition of property in insolvency legislation had been progressively extended, that the definition in section 436, though circular, is not exhaustive, and that "it is hard to think of a wider definition of property". The court's decision on the second point turned on the terms of the 1990 Act, but it proceeded from a view of the policy behind the disclaimer regime. At paragraph 42 Sir Andrew Morritt V-C said this:

"The affirmative reasons for disagreeing with the judge start with the consideration of the very considerable and oft-repeated public policy requirement that the property of insolvents should be divided equally amongst their unsecured creditors. An important aspect of the implementation of that policy is the ability to disclaim onerous property; otherwise the available assets are, in practice, appropriated to the future or prospective creditor who holds the right corresponding to the onerous property: c.f. In re Park Air Services plc [2000] 2 AC 172, 185. This is no doubt why the restriction on the ability to disclaim thrown up by the decision of Harman J in In re Potters Oils Ltd (No 2) [1985] BCLC 203 was so swiftly removed in section 178 of the Insolvency Act 1986. In my view it would require clear words to exclude the operation of section 178 of the 1986 Act from specific items of property or specific insolvents."

62. That is an aspect of the policy which underlies the section. In Hindcastle Ltd v. Barbara Attenborough Ltd [1997] AC 70, the purpose of the section was said by Lord Nicholls at page 86 to be "to facilitate the winding-up of the insolvent's affairs". However, the section is not limited to an insolvent liquidation. In Re Park Air Services Ltd. [2000] 2 AC 172 the company was in members' voluntary liquidation, and creditors would be paid in full. Even so disclaimer of an onerous lease was useful. Lord Millett said at page 184 that "the reason the liquidator is given the right to disclaim onerous property is in order to enable him to achieve an early closure of the liquidation." All of these objects must be borne in mind when considering whether a particular contract which is sought to be disclaimed is within the section.
63. For reasons already given, it seems to me that, if the Deed is within the section at all, it must be as an unprofitable contract. That phrase was in the previous law (see Companies Act 1985 section 618(1) re-enacting part of section 323 of the 1948 Act) but has not been considered in any English decision. The phrase is also used in the equivalent provisions in the Australian Bankruptcy legislation and the Australian courts have had to construe those in several cases. The context is not exactly the same, because it seems that, under the Australian legislation, a trustee or liquidator can disclaim any contract but requires the court's leave to do so unless it is an unprofitable contract: see Bankruptcy Act 1966 section 133(1A) and (5A) and Corporations Law section 568(1)(f) and (1A).
64. I can limit my citation to one of the most recent of the Australian cases, Transmetro Corporation Ltd v. Real Investments Pty Ltd (1999) 17 ACLC 1314, decided by Chesterman J in the Supreme Court of Queensland, who reviewed the relevant English and Australian cases. The contract in question there arose as follows. Real Investments owned plots of land for residential use, and other commercial land. The residential land was to be sold to members of the public on terms that it would then be leased to another company, Ballville. The commercial land would be let directly by Real Investments to Ballville. Ballville was to carry on the business of a hotel on the land, and Transmetro would supply management and administration services. Transmetro would also take a sublease from Ballville of the land of which the latter was lessee. Depending on how matters proceeded, and whether options for renewal were taken up, the arrangement might last for up to 20 years. Real Investments and Ballville both went into liquidation, and their liquidators sought to disclaim the agreement by which these arrangements were established.
65. Chesterman J extracted five principles from the previous cases, at paragraph 21, as follows:

"A contract is unprofitable for the purposes of section 568 if it imposes on the company continuing financial obligations which may be regarded as detrimental to the creditors, which presumably means that the contract confers no sufficient reciprocal benefit.

Before a contract may be unprofitable for the purposes of the section it must give rise to prospective liabilities.

Contracts which will delay the winding-up of the company's affairs because they are to be performed over a substantial period of time and will involve expenditure that may not be recovered are unprofitable.

No case has decided that a contract is unprofitable merely because it is financially disadvantageous. The cases focus on the nature and cause of the disadvantage.

A contract is not unprofitable merely because the company could have made, or could make, a better bargain."

66. On the basis of those principles and the facts of the case he held that the contract was an unprofitable contract which the liquidator had validly disclaimed.
67. Considering the facts of the present case in the light of those principles, although the Deed is detrimental to the creditors of Group, this is not because it imposes on Group continuing financial obligations. It does not give rise to prospective liabilities. It does not require performance over a substantial period of time or involve expenditure. It seems therefore that Chesterman J would not have regarded the present contract as one which the liquidator, under the Australian legislation, could disclaim without getting permission from the court.
68. Looking at the matter more broadly, while the Deed is disadvantageous to Group in present circumstances, the disability which it imposes on Group as regards the inter-company debt is, as it were, part of the price for the advantage secured by Group through obtaining the assistance of AIG in getting the payment of duty deferred. Given that Group has had the benefit for which it entered into the Deed, it seems to me that it would be inappropriate to look at the transaction at this stage purely from the point of view of the present disadvantage to Group and its creditors, to which Group agreed to submit in exchange for the advantage secured at the outset. Of course, if the "price" due from Group for the benefit already provided were payable in money, then AIG would have to prove for the debt, unless it were secured. Because the benefit for which AIG stipulated was deliberately aimed at improving AIG's position if any of the Indemnitors became insolvent, for Group to be able to avoid that advantage by disclaimer would subvert much of the point of the clause.
69. More generally, it does not seem to me that the Deed can properly be characterised as an unprofitable contract simply because the consequence of it being implemented at this stage is disadvantageous to Group and its creditors. In terms of Chesterman J's question whether the contract confers a sufficient reciprocal benefit, Group has already had the benefit for which it contracted. Who is to say that this benefit was not sufficient? No doubt it seemed sufficient to those involved in the management of Group at the time.
70. In my judgment the principles set out by Chesterman J are a valuable guide to what is or is not an unprofitable contract under section 178(3)(a), despite the differences in the legislation. Applying those principles, I hold that the Deed is not an unprofitable contract within the meaning of section 178(3)(a) and it is not open to Group's liquidators to disclaim it.
71. I can therefore deal with the relevant issues as follows.

o As regards Issue 7, it is not open to Group's liquidators to disclaim the Deed or the contract of which the Deed forms part as "onerous property" under section 178 of the Insolvency Act 1986.

o Issue 8 would only arise if it were held that it is open to Group's liquidators to disclaim the Deed or the contract of which the Deed forms part. Group's liquidators surrendered to the court their discretion as to whether or not to exercise the statutory power to disclaim. In the circumstances this question does not arise, and I do not propose to express a view as to what my answer would be if it did arise.

Should Group prove in the liquidation of Stations?

72. I must next consider the points raised by issues 9 and 11. These are posed on the basis that, notwithstanding the contentions by Group which I have considered in the earlier parts of this judgment, clause 8.2 of the Deed is valid, and binds Group not to prove in the liquidation of Stations in respect of any debts while money is still due to AIG. (Issue 10 assumes the contrary and therefore does not arise.) Issue 9 is concerned with whether, even though it would be a breach of contract, Group should nevertheless prove in the liquidation of Stations. Issue 11 arises from AIG's deemed application for an injunction to restrain Group from so proving. Essentially the question is whether Group's liquidators should cause it to act in breach of its contract, accepting that this would give rise to a claim in damages, because the cost to Group's creditors of paying damages to AIG would be a great deal less than the financial disadvantage to them if the contract is complied with. Conversely, AIG says that, if necessary, it is entitled to an injunction to enforce the negative obligation not to prove, because damages would not be an adequate remedy. An incidental point which has been raised is whether, if damages were payable, they would rank as an expense of the liquidation, so as to fall due for payment in full rather than being the subject of proof and therefore payment of a dividend only.
73. I can conveniently deal first with the question whether damages would or might be an expense of the liquidation, so as to be payable in priority to other claims: see Insolvency Act 1986 section 115. This is not a question on which the court has any discretion: see Re Toshoku Finance UK plc [2002] UKHL 6, [2002] 1 WLR 671, at paragraph 38. The categories of such expenses are listed in the Insolvency Rules 1986, at rule 4.218. Mr Randall submits that damages payable by Group for a breach of contract incurred in order to collect in an asset, namely a dividend on the inter-company debt, would be "expenses or costs which are … incurred by … the liquidator in … realising or getting in any of the assets of the company" and are therefore covered by rule 4.218(1)(a).
74. I cannot accept that argument. In an economic sense, damages payable for a breach of contract might be described as the price, or the cost, of committing the breach of contract. If a company owned land whose development potential required the negotiation of a right of access over a ransom strip, then I can see that the price payable to the owner of the strip to secure that right of access would be an expense incurred in realising the asset. Mr Randall submits that what would be done in the situation he proposes, of Group's liquidators flouting the contract and submitting a proof of debt to the Stations liquidators, would be similar to the hypothetical company simply making its road over the ransom strip and accepting a liability to pay damages to the owner of the strip. In that situation, the damages would be equivalent to the negotiated price for buying the right of access over the strip, as in cases such as Jaggard v. Sawyer [1995] 1 W.L.R. 798. But in this statutory context it would be an extraordinary use of language to describe as "costs and expenses" sums payable by way of damages for breach of contract, in the absence of agreement with the owner of the strip, so as to be comparable with, for example, conveyancing or estate agent's fees on the sale of land. It would also have potentially wide ramifications as regards other liabilities for breach of contract in other cases. In my judgment, if Group were to prove in Stations' liquidation, and if Group were as a result to be liable in damages to AIG, the amount of those damages would be a debt for which AIG would have to prove, and would not be given a higher priority in payment as a cost or expense of the liquidation.
75. The contention that Group's liquidators should prove in Stations' liquidation, although they would be in breach of contract, is based on the proposition that they would thereby be able to collect in a dividend on the inter-company debt, which they could distribute to Group's creditors. Mr Snowden points out that, for this to be right, Group would also have to be able to ignore the effect of clause 8.3 of the Deed. On the face of it, that clause has the result that Group would hold on trust for AIG the whole of what it received by way of dividend in the liquidation of Stations, and would have to pay it over forthwith to AIG. In effect, the dividend received would not belong to Group at all, but to AIG. That is right, and there would be no point, for Group, in proving in Stations' liquidation in any event. The result would be to favour AIG over the other creditors of Stations, because on the one hand all creditors would receive a smaller dividend, because of the competition from the inter-company debt, and on the other AIG would take the whole benefit of the dividend payable in respect of the inter-company debt. AIG would be put in the same position as if it had adopted the approach of turnover subordination, as described at paragraph 26 above. That is not, however, what AIG seeks to achieve.
76. If it were the case, contrary to my view, that, if Group were to prove in the liquidation of Stations, it could ignore clause 8.3 and distribute the dividend so received as an asset to its own creditors, then it would be necessary to consider AIG's claim for an injunction to restrain Group's liquidators from putting in such a proof. The case for an injunction is based on the strong presumption that the court will grant an injunction to enforce a valid negative contractual obligation: Doherty v. Allman (1873) 3 App Cas 709, 719-720. The court will not, however, grant an injunction if damages would be an adequate remedy, and may sometimes refrain from granting an injunction if excessive hardship would result. The court will consider all the circumstances and assess whether or not it is just to confine the party seeking the injunction to damages or rather to grant specific relief by way of injunction or specific performance: Rainbow Estates v. Tokenhold [1999] Ch 64, 72-3.
77. It seems to me that damages would plainly not be an adequate remedy for this breach of contract, if for no other reason because the damages would have to be the subject of proof, and would not be payable in full. Mr Randall's proposition that damages would be adequate presupposed that the damages would be payable in full as an expense of the liquidation, which I have held not to be the case.
78. More generally, however, it seems to me that, in the case of an agreement of this kind for the subordination of debts, whose relevance is above all to the case of an insolvency, the court would and should, if necessary, enforce the negative obligation against proving in the liquidation by an injunction. Of course the consequence is unfortunate for Group's other creditors, but that is the intended result of the agreement which Group entered into freely, in order to secure the advantage of deferment of duty. It is impossible to tell what the position would have been as regards other creditors, by comparison with the present situation, if Group had not obtained that advantage.
79. In the circumstances I do not need to discuss the rival submissions as to how damages should be assessed, if Group did prove in the liquidation of Stations and if, contrary to my view, any dividend received by the liquidators of Group upon such a proof were not caught by the provisions of clause 8.3 of the Deed.
80. Issues 9 and 11 can therefore be answered together as follows. On the basis that clause 8.2 of the Deed is valid (as decided on Issues 3 and 5) and that it would be a breach of it for Group to prove in the liquidation of Stations, Group should not prove for the inter-company debt due from Stations in the liquidation of Stations, because, first, to do so would not achieve the desired objective, as the dividend would be held in trust for AIG under clause 8.3, which confers a proprietary right and cannot be ignored, and secondly, even if this were not the case, the court would, on AIG's application, restrain Group by injunction from breaking its contract not to prove. If those points were not sufficient, I add that, since Group's liquidators seek directions from the court as to whether they should break their contract and prove in the liquidation, I would direct the liquidators not to submit a proof of debt.
81. I have already held (see paragraph 34) that Stations is not under an implied obligation not to admit Group to proof, if it were to submit a proof. A related question was touched on in argument, as to whether there might be a liability in tort for assisting or procuring a breach of contract if Group put in a proof and Stations paid a dividend on it, but Mr Snowden accepted that no such liability would arise, and I need say no more about it. If Group were to submit a proof, Stations would not itself be in breach of contract by admitting it. As it is, that will not happen, but if it did, Stations' liquidators would have to deal with the proof in the normal way. Since it will not happen, Stations' liquidators will have to deal with the winding-up of Stations without regard to the position of Group as a creditor.
82. Issue 10 does not arise, because it presupposes the invalidity of clause 8.2 of the Deed.
83. For those reasons, I decide those issues that arise in favour of AIG and against Group, apart from the subsidiary question whether Stations is bound by contract not to admit a proof of debt if one were submitted by Group in breach of clause 8.2.