2e's or not 2e's, that is the question

In our blog on Fitzroy Robinson Ltd -v- Mentmore Towers Ltd (Key personnel?), we noted that commercial lawyers have to keep an eye out for new case law in related areas.  Another important example is the recent Chancery Division insolvency case of Butters -v- BBC Worldwide, which addresses the common circumstances of a joint venture shareholder licensing IPR to a joint venture.

2 Entertain JV

2 Entertain JV

The case involved the joint venture agreement (JVA) setting up 2 Entertain Limited, abbreviated in the judgement as “2e”.  2e had a subsidiary, BBC Video Limited, which was the licensee under a master licence agreement (MLA) that was conditional upon the JVA.  The MLA included a term that terminated the licence if, following an Insolvency Event within the Woolworths Group, BBC Worldwide served a notice in accordance with the JVA requiring the Woolworths’ shareholder in 2e (WW Realisations 8 Ltd) to sell its shares in 2e to BBC Worldwide.

As a result of this linking between licence termination and notice to sell shares, it was successfully claimed that the clause in the MLA   to terminate the licence offended the insolvency deprivation principle, being the common law principle set out in Ex p Jay; In re Harrison (1880) 14 Ch D 19.  This principle is the common law equivalent of s.107 of the Insolvency Act 1986 and r.4.181 of the Insolvency Rules 1986, which ensure that the assets of a company on insolvency are distributed in accordance with the shareholders’ and creditor’s share of their interests in the company.  It is against public policy to permit a company to contract out of this principle to favour one shareholder or creditor above all the others.

The key lesson for IT/IP and commercial lawyers is not that automatic termination of licences upon insolvency offends the principle, but that the termination cannot be linked to any mechanism that enables the licensor to benefit as a creditor/shareholder from the fall in value in the licensee as a result of the termination of the licence. 

It should be notes that a similar case, Perpetual Trustee Co Ltd -v- BNY Corporate Trustee Services, involved this principle and came to different conclusions.  As permission of this case to be appealed has already been given by the Chancellor, it is expected that both these cases will go to appeal.

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