Thursday, 31 March 2011

The Middle Class Experience of Debt and Insolvency Hotspots

In two articles that are reminiscent of the issues examined in Professors Warren, Westbrook and Sullivan's The Fragile Middle Class (Warren, Elizabeth, Teresa A. Sullivan & Jay Lawrence Westbrook. The Fragile Middle Class: Americans in Debt (Yale University Press 2000); see also: Warren, Elizabeth. The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke (Basic 2003) and; Warren, Elizabeth. "The Vanishing Middle Class" in Ending Poverty in America: How to Restore the American Dream 38 (The New Press, 2007)), The Daily Telegraph and The Guardian have published interesting pieces on the increasing financial pressures that the English middle classes (pictured) are being subjected to. This group are apparently finding that they are part of a growing squeezed middle.  Both articles make interesting use of some statistics from Experian. Meanwhile, the BBC have been concentrating on insolvency hotspots.

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Wednesday, 30 March 2011

Insolvency Service publication: Summary of responses to the consultation on the withdrawal of the optional fascility for liquidations to the bank with the Insolvency Services Account ("ISA")

The Insolvency Service (IS - pictured) have published a new document entitled: "Summary of responses to the consultation on the withdrawal of the optional fascility for liquidations to the bank with the Insolvency Services Account ("ISA")." (bottom right of the front page) The IS document provides a helpful summary of responses: 

Does the optional facility for voluntary liquidators to use the ISA need to be retained?
Would removal of the facility result in extra costs and if so what would these costs be?
Yes: In MVLs,  important to shareholders mainly due to the effective guarantee and security the ISA offers. Recommended by IP Regulator on prudence & safety grounds. Deposit rates offered.
No: except possibly lower interest rates outside ISA
Yes: The cheque writing facility from the ISA is extremely beneficial when paying large dividends
Yes: cheques would need to be manually written and signed by the liquidator which is likely to increase the costs of a liquidation.
No: Some benefit where a large number of dividend cheques to be issued and historically good rate of interest on deposits but this is no longer the case. ISA too complex and could be abolished altogether for cases handled by IPs.
No: Other than potential need to retain unclaimed dividend fee.
Yes: although current low rate of uptake of ISA due to low interest rates. Liquidator will take pragmatic view on grounds of relative costs of ISA against interest on local bank account.
Yes: ISA cost effective where large number of dividend cheques issued. Earlier closing of cases due to automatic operation of unclaimed dividends account.
Yes: Good for small IP practices who can keep all funds in one place and have a uniform approach to banking.
Not specified.
Yes: cost effective where dividend cheques issued. Earlier closing of cases due to automatic operation of unclaimed dividends account.
Yes: Mainly set-up costs where large number of commercial accounts would be needed and staff resources to deal with transition.
Yes: competitive interest rate, low cost of paying dividends to large numbers of shareholders, earlier closing of cases due to automatic operation of unclaimed dividends account. Mostly deals with MVLs.
Yes: particularly for dividends to overseas recipients.
No: but operate most CVLs and 40% of MVLs through ISA.
Yes: Higher costs of operating commercial accounts. Costs of issue and re-issue of cheques to large numbers of creditors. Set-up costs and loss of unclaimed dividend facility.
No but retain unclaimed dividends (which remains anyway)
None specified.

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New Legislation for London and Ireland

There are a number of new pieces of legislation that have been published and which are due to come into force over the next few months or so. They are: 

"In certain instances the Insolvency Rules 1986 (S.I. 1986/1925) allocate proceedings in relation to individual insolvency to the London insolvency district. This Order defines the areas that fall within the London insolvency district (Article 2).

The Order confers jurisdiction on the Central London County Court, for the purpose of individual insolvency proceedings that are allocated to the London insolvency district by the Insolvency Rules 1986 (Article 3). It also makes a consequential amendment to section 373(3)(a) of the Insolvency Act 1986 (Article 5).

To reflect the changes outlined above, the Order also designates the areas which fall within the insolvency district of the Central London County Court as being the districts of the county courts falling within the London insolvency district (Article 4). It then also makes consequential amendments to the Civil Courts Order 1983 (Articles 6 and 7) and to the Civil Courts (Amendment No. 3) Order 1992 (Article 8), again to reflect the changes outlined above.

Proceedings being dealt with in the High Court, that would have been allocated to the Central London County Court if this Order had been in force when proceedings were commenced, may be transferred to the Central London County Court or continued in the High Court (Article 9)."

See also:

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Tuesday, 29 March 2011

Insolvency Lawyers Association (ILA) 2011 Academic Colloquium at the University of Oxford

I was conflicted out by teaching commitments at the LSE (where I have been covering Professor Finch's sabbatical) so could not make the recent Insolvency Lawyers Association (ILA) 2011 Academic Colloquium at the University of Oxford. The event took place on the 25th March in Oxford. I am particularly annoyed at missing the event as my sources tell me that the day was a great success. Nearly all the top names in our subject attended, including two of my old tutors, which makes my teaching enforced absence even more vexing! The attendees included a US bankruptcy judge, practitioners (solicitors and barristers), academics and postgraduate students. In no particular order the attendees were (pictured):
Mr Jeremy Bamford, of Guildhall Chambers, is summarising the day for the ILA website. With his permission I will post his summary, and the details of the various papers which were delivered, on the blog in this post over the next couple of days. Here is Jeremy's note from the event:

"A glorious Spring day heralded the ILA Academic Colloquium 2011 at the Randolph Hotel in Oxford. Professor David Milman and Professor Gerard McCormack (as Chairman) welcomed a veritable Who's Who of leading insolvency academics, Peter Cranston (ILA President), Chris Mallon (ILA Vice President), practitioners (solicitors and barristers) and the Honourable Robert E. Gerber, US Bankruptcy Court Judge for the Southern District of New York.

Given the approval on 22nd March 2011 of the second CVA for JJB Sports and the scathing comments of Henderson J in finding the Miss Sixty CVA to be unfairly prejudicial to the interests of Mourant (Technical Bulletin 295), it was apt that Professor Adrian Walters and Dr Sandra Frisby started the Colloquium with their empirical research into "CVA Outcomes" and their attempts to identify The Good, The Bad & The Ugly. Based on research from a dataset of 547 CVAs, recorded information and stratified sampling, they explored CVA outcomes, duration, returns to unsecured creditors and costs. Their key findings suggest that whilst a majority in number of CVAs are proposed by small companies, the moratorium procedure is rarely utilised and that in those cases where the CVA succeeds the creditors appear to do very well. The speakers also put forward a number of policy implications arising from their research, including whether the moratorium should be extended to larger companies and a suggestion for CDDA reporting in respect of failed CVAs to deter potential abuse.

Kristin van Zwieten of Magdalen College Oxford and a Doctoral candidate with the Law Faculty then enthralled delegates with her talk on "Corporate Insolvency Law in India", based on her paper "Courts in Transition: Explaining the operation of Indian Corporate Insolvency Law". Kristin summarised the corporate insolvency procedures currently available in this emerging insolvency market and then concentrated on the much discredited rehabilitation mechanism contained within the Sick Industrial Companies Act 1985 ("SICA"). Based on an extensive review of all available SICA cases handed down before September 2009 obtained from Indlaw, Kristin identified 3 judicial innovations in the benign interpretation and application of SITA in the period following India's transition to a market economy, which appear to have been driven by judicial concern for company workers in a country lacking any welfare state safety net.

Professor McCormack then shifted delegates' attention closer to home with his talk on Irish Banking Insolvency and his paper "Bad banks - how to deal with "bad" bank assets - Ireland and other case studies". He explored the use of asset management companies (AMCs) as a means of dealing with toxic bank assets with case studies from the use of AMCs in Sweden, Malaysia and the US, the experience from Ireland of the National Asset Management Agency (NAMA) and highlighted criticisms of such schemes, in particular those advanced by the Nobel Laureate Joseph Stiglitz who gave evidence as an expert witness in the legal challenge to NAMA: Dellway Investments v NAMA [2000] IESC 4.

A lively round table discussion concluded the Colloquium, which focused principally on the Insolvency Service's consultation on administration expenses and the efficacy of the ILA Technical Committee's submission to the Insolvency Service of suggested amendments to the administration expenses regime. Further feedback from both academic members and practitioners concerning the suggested amendments is sought by the ILA and can be left on the ILA Forum or e-mailed to the Technical Committee.

The Colloquium proved to be a great success and is the first major event to follow Peter Cranston's invitation to academics to become members of the ILA from 1 December 2010, thereby encouraging greater collaboration between practitioners and academics. In the finest tradition of Oxford the debate was continued by both academics and practitioners at The Kings Arms.

Many thanks to Professor Milman, Professor McCormack and John Tribe for organising the technical content; to the speakers for the technical content and to Chris Mallon, Sian Ellis and all the team at Skadden for organising a great event."

For those who also missed the Oxford event - do not worry! The Insolvency Service and Nottingham Law School Insolvency Research Day is on the 5th April. We can get our insolvency discussion fix then. See you there!  

Picture Credit: Insolvency Lawyers Association. 

Bankruptcy, woodland and Trustee's claims - Ludlam v Courtman & Anor [2011] EWHC 742 (Ch) (25 March 2011)

Mr Justice Briggs (pictured) has handed down his judgment in Ludlam v Courtman & Anor [2011] EWHC 742 (Ch) (25 March 2011). The case is particularly interesting as it contains a discussion of issues relating to bankruptcy, the vesting of property in a trustee in bankruptcy and the consequences of arguing over ownership interests. The disputed property in the case relates to a plot of woodland. The wife of the bankrupt is contending that she owns the woodland. By way of factual explanation Briggs, J notes: "For his part, the Trustee's stance is one of defensive neutrality. He appears to assume that the Woodland is prima facie vested in him by reason of Mr Ludlam's bankruptcy, although from time to time during extensive litigation between his predecessor Ms Exley and the Ludlams mainly concerning Montgomery House, Ms Exley appears to have been content to assume, but without extensive inquiry, that the Woodland belonged to Mrs Ludlam. The Respondents do not suggest that any gift of the Woodland to Mrs Ludlam in 1990 is vulnerable to be set aside as a fraud on creditors. There is nothing before the court to suggest that the Trustee is actively seeking a sale of the Woodland, or that the supposed (but as yet unidentified) purchaser of the Woodland from Mrs Ludlam in 1999 has taken any steps either to occupy or deal with it." 

The argument over the woodland's ownership maybe an argument for respective creditor claims, as the learned judge notes that Mrs Ludlam is soon to have her own bankruptcy hearing due to legal cost exposure. For the time being though her creditors may be satisfied with the judges finding that, "The result is that, while it would be inappropriate for the court to declare, in a manner effective as against the rest of the world, that Mrs Ludlam is the owner (and therefore entitled to be registered as the proprietor) of the Woodland, it is appropriate for the court to declare that, as between her and her husband's Trustee, she has the better title to it."

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Monday, 28 March 2011

IP remuneration in the Court of Appeal - Brook v Reed [2011] EWCA Civ 331 (25 March 2011)

Mr Justice David Richards has handed down his judgment (whilst sitting as a Court of Appeal judge - the formal robes for this position are pictured right) in Brook v Reed [2011] EWCA Civ 331 (25 March 2011). The case concerns Insolvency Practitioners' (IP) remuneration and in particular a consideration of The Practice Statement: The Fixing and Approval of the Remuneration of Appointees (2004) (Practice Statement) and the costs and remuneration of Trustees in Bankruptcy. As the learned judge notes, "The development of the law and practice in this area has to be seen against a background of public concern as to the levels sometimes reached by office-holders' fees and remuneration, together with a public interest in seeing that office-holders' duties are competently and properly carried out." Richards, J then goes on to cite Dickens, Maxwell, the OFT and the IS response to the OFT as further examples of why IP costs have been a public issue of concern. 

In a tour de force of the area of IP remuneration the learned judge then goes on to examine Mirror Group Newspapers plc v Maxwell (No 2) [1998] 1 BCLC 638 judgment and the subsequent Ferris Report into IP remuneration before citing both Re Independent Insurance Co Ltd (No 2) [2003] 1 BCLC 640 and In Re Cabletel Installations Ltd [2005] BPIR 28. 

Richards, J then examines the Practice Statement in some depth. On the legal effect of the statement he notes: "The Practice Statement of itself cannot make law on substantive issues or require courts to apply the guiding principles stated in it. But the Practice Statement is not an attempt to create a new set of principles, but a convenient means of gathering together in one place the principles to be derived from the Insolvency Rules and authority, including the most recent at that time, the judgment of Ferris J in Maxwell."

The learned judge then includes an interesting passage on how the Practice Statement has been used:

"The Practice Statement acquires authority as a statement of guiding principles if it is expressly approved and applied as such in judgments at an appropriate level. In at least two reported cases, it has been approved and applied by High Court Judges: Simion v Brown [2007] BPIR 412 and Hunt v Yearwood-Grazette [2009] BPIR 810.
The great majority of applications relating to office-holders' remuneration are heard by the Registrars at the Royal Courts of Justice and by district judges in the Chancery Division District Registries and in those county courts having insolvency jurisdiction. It is apparent from reported decisions of the Registrars that they apply the Practice Statement: see for example Re UIC Insurance Co Ltd [2007] BPIR 494 and 589, Barker v Bajjon [2008] BPIR 771, Freeburn v Hunt [2010] BPIR 325 and Re Super Aguri F1 Ltd [2011] BPIR 256. District judges do likewise, as can be seen from the judgment in Hunt v Yearwood-Grazette.
The Statement has also been referred to with approval by courts in other common law jurisdictions: see Korda, Re Clynton Court Pty Ltd [2005] FCA 543 (Finkelstein J, Federal Court of Australia), Flynn v McCallum, Re Roslea Path Ltd [2009] NZHC 2318 (Heath and Venning JJ, High Court of New Zealand)."

Following a consideration of the facts of the bankrupt's case the learned judge dismiss the appeal after applying the substance of the Practice Statement. 

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Schemes of Arrangement and Insolvency - Re Uniq Plc [2011] EWHC 749 (Ch) (25 March 2011)

Mr Justice David Richards has handed down his decision in Re Uniq Plc [2011] EWHC 749 (Ch) (25 March 2011) whilst sitting at the Royal Courts of Justice (pictured). The decision is particularly noteworthy as it contains a discussion of schemes of arrangement within an insolvency context. As the learned judge notes: "The scheme, and the restructuring of which it forms an integral part, are both complex. Their purpose is to provide a solution to the financial problems posed by the deficit on Uniq's pension scheme. Without a solution it seems inevitable that Uniq and its main subsidiary would become insolvent within a year." In relation to the use of schemes within an insolvency context Richards, J notes: "The proposal is further evidence of the utility of schemes of arrangement as a means of achieving a wide range of purposes including, as in this case, securing the long-term future of a company or group which would otherwise in due course face insolvency."

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Friday, 25 March 2011

Landmark moments in Insolvency History - The Powdrill and 1994 rescue issue as a landmark

Professor Charlotte Villiers once referred to the employment contract adoption issue in insolvency law as  having a history which was best described as "chaotic.” (see: Villiers, C. Employees as creditors: a challenge for justice in insolvency law [1999] Comp. Law, 20(7), 222-232). The decisions in Nicoll v. Cutts (1985) 1 B.C.C. 99, Re Specialised Mouldings Ltd (unreported) February 13th, 1987, and Powdrill v. Watson [1994] 2 BCLC 118   certainly caused some issues for the rescue culture, insolvency practitioners and employees, which the Insolvency Act 1994 went some way to remedy. This group of decisions and the statute could be accounted one of the landmark moments for the rescue culture just as the 2005 Re Spectrum judgment was a landmark moment for the extension of security and classification of fixed and floating charges. On historical landmarks in insolvency law see Graham, D. A dark and neglected subject: landmarks in the reform of English insolvency law (2002) I.I.R, 11(2), 97-119.

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Thursday, 24 March 2011

Is English insolvency law still viewed with, "disrespect and contempt"?

One learned commentator has observed that "Cork was convinced that the prevailing leniency towards directors of insolvent companies was a predominant cause for the disrespect and contempt in which the law was held and that an 'entirely new approach' was required." (Finch, V. Directors' Duties: Insolvency and the Unsecured Creditor, in: Clarke, A (Ed). Current Issues in Insolvency Law, Current Legal Problems, Stevens & Sons, London, 1991, at page 91). Has the approach engendered in the Insolvency Act 1986 ( IA86 i.e. s,213, s.214, s.216) and the Company Directors Disqualification Act 1986 (CDDA86) changed our perception of insolvency law and its use? Have these measures worked or is the English insolvency law still held in disrepute. 

The recent File on Four programme would support the pre-Corkian view, i.e. that English insolvency law is still held in disrepute, but for other reasons. R3's recent call for more to be done in terms of disqualification would also support the contention that much remains to be done, as would the OFT report and the plight of the unsecured creditor. Will insolvency law always be viewed with an air of discredit and negativity - not unlike John Wilmot, the 2nd Earl of Rochester (pictured) - or is there some public confidence in the system?

Wednesday, 23 March 2011

Are unsecured creditors apathetic?

Yesterday's post on unsecured creditors[1] set me thinking about similarities between this class of creditor and certain species of shareholder. The Cork Committee, the OFT and the Insolvency Service have all identified that there is a certain amount of apathy amongst creditors. On this point the Cork Committee noted: “…it has been suggested to us that the elaborate structure for creditor control in bankruptcy and compulsory winding up is illusory, largely owing to apathy and indifference on the part of creditors themselves.”[2] They continued:

“We consider it unsatisfactory that creditors, whose experience would be invaluable to the liquidator or trustee, are discouraged from participating in the administration of an insolvent estate. We are in no doubt that the machinery should be such as to allow, and indeed encourage, those creditors who have a genuine interest to involve themselves in all types of insolvent administration.”[3]

On creditor apathy the Cork Committee noted that “because of the indifference of creditors towards supervising the administration of insolvent estates…there has also been an increasing measure of judicial control.”[4] The Cork Committee proposed three reasons for this indifference:

“ - There is a generally held belief that most trustees and liquidators are efficient, reliable and experienced.
 - There is a lack of interest on the part of business creditors, who allow for the occasional bad debt in fixing their prices and write if off when it occurs, thereby reducing their taxable profits.
 - Thirdly, and perhaps of greatest significance there is a resigned acceptance of the fact that in most cases the general body of are only likely to receive a small divided.”[5]

It could be argued that the position of unsecured creditors has some parallels with shareholders in widely dispersed ownership model companies. The famous Berle and Means thesis showed that shareholders become apathetic within large widely dispersed ownership model companies as they can have little impact on the way in which the company is managed. The separation of ownership and control can lead, and Pettet has called this an axiom in modern times,[6] to the imposition of a self-perpetuating oligarchy.[7] Shareholders simply feel powerless and there disengage with the proper monitoring of management. A similar pattern of behaviour may be occurring with unsecured creditors. The Cork Committee noted that unsecured creditors had little, if any involvement in Committees of Inspection because they felt confusion over the rules governing the committees of inspection and how these were constituted. They noted that they “received evidence of confusion over the interpretation of these provisions and precise nature of the functions to be performed by Committees of Inspection…most unsatisfactory.”[8] Creditors should involve themselves in the insolvency process as “the underlying principle is that since the estate is being administered primarily for the benefit of the creditors, they are the persons best calculated to look after their own interests.”[9]

One could respond to this unsecured creditors apathy and argue that it is not that complaints mechanisms and such like are defective but that unsecured creditors engagement is problematic. It is that issue which is at the heart of the problem that the IS Consultation identifies and it is because of this that we need to examine why the quantity of unencumbered assets are so small, rather than focusing on participation in the management of distributing such a small fund. Methods of distribution are important,[10] but they do not resolve the question of the quantum of what is available to be distributed. A more far reaching evaluation of the nature and functions of our corporate insolvency laws is required for that task.[11] For well over 150 years unsecured creditors have experienced numerous incursions into the pot that may have been available for their satisfaction, but for IP fee claims,[12] security devices, ROT clauses, trust instruments, preferred creditors and such like. 

At a relatively recent Insolvency Service conference on the use of information technologies, the Director of Policy at the Insolvency Service, Nick Howard, responded to a question from Professor Sir Roy Goode QC by suggesting that he might like to chair a Cork Mark II.[13] The OFT report perhaps highlights that this may not have been an entirely unreasonable suggestion. If there is no substantive change then strong creditors will continue to dominate corporate insolvency. It could therefore be argued that the OFT Report and resulting IS Consultation amount to nothing more than an exercise in moving the deck chairs around. Cork was critiqued by one commentator for not visiting the fundamentals,[14] a similar charge could perhaps be laid on the current consultation and reform process. One could respond however by noting that engaging in Warren like paternalism for unsecured  creditors is commendable, but like apathetic shareholders, or missing tutorial undergraduates, there comes a stage when this paternalism is destructive of individual creditor motivation. As the IS Consultation has observed, the systems are there – use them! 

Reform which truly impacts on unsecured creditors may involve, inter alia, a consideration of alternatives to pari passu such as paying in order of time of creation of the debt, payment by reference to ethical considerations, according to the size of sum owed, according to the need of each individual creditor and their inability to sustain losses, payment on public policy grounds, etc.[15] an alternative view which has been promulgated by Milman suggested that, “as far as unsecured creditors generally are concerned, the main hope for the immediate future lies not in terms of classical priority rules being changed but more in the trend towards making directors personally liable for corporate debts.”[16] This may be a truism, but have realisations from s.214 or s.239 of the Insolvency Act 1986, for example, actually recouped much for the unsecured creditors?
One final example will be given in relation to why the IS Consultation does no go far enough. There are current seven Recognised Professional Bodies (RPBs) for a total of 1313 Insolvency Practitioners.[17] The Insolvency Service itself makes up the eight possible RPB. The OFT have noted that this is not an issue for the smooth running of corporate insolvencies.[18] Really? This proposition must be tested with more examination. 

[1] For an example of proactive unsecured creditor behaviour see the Privy Council case: Cambridge Gas Transport Corp v Official Committee of Unsecured Creditors of Navigator Holdings plc and others [2006] UKPC 26, [2006] 3 All ER 829.
[2] Cork Report para 914.
[3] Cork Report para 917.
[4] Cork Report, at para 916.
[5] Cork Report para 914.
[6] Pettet, B. Company Law. 2nd Edition. Longman, London. 2004.
[7] Berle, A & Means, G. The Modern Corporation and Private Property. Revised Edition. Harcourt, New York. 1968. For a critique of their work see: Herman. Corporate Control, Corporate Power. Cambridge University Press, Cambridge. 1981.
[8] Cork Report para 918.
[9] Cork Report para 913.
[10] And outside the scope of this brief blog post. See further: Mokal CLJ. 'Priority as Pathology: The Pari Passu Myth’ [2001] Cambridge Law Journal 581-621. Whilst preferring Mokal and Cork’s conceptualisation of pari passu as, inter alia, a theoretical device (Cork Report at para 233) it must be noted that some commentators still view the principle as: a ‘cornerstone’ (Cork Report despite their earlier rather inconsistent note on it being on theoretical); ‘cardinal’ (Goode, R. The Death of Insolvency Law (1980) Co. Law 123); ‘fundamental’ (Keay & Walton. Insolvency Law: Corporate and Personal.  Pearson, 2003, at page 396); ‘cornerstone’ (Seligson, C. Preferences Under the Bankruptcy Act (1961) 15 Vanderbilt Law Review 115); and finally a “grundnorm” although Milman does go on to note that, “the pari passu rule is a crude standard to apply in the legal system of the late 20th century.” (see Milman Priority)
[11] For two opposing views see: Warren, E. Bankruptcy Policy (1987) 54 Univ.Chicago L Rev. 775 and; Barid, D. Loss Distribution, Forum Shopping and Bankruptcy: A Reply to Warren (1987) 54 Univ.Chicago L Rev. 815. For a more recent and novel approach see: Mokal, RJ. Corporate Insolvency Law – Theory and Application. Oxford: OUP, 2005.
[12] See further: Buchler v Talbot [2004] UKHL 9; [2004] 2 A.C. 298 and the subsequent amendment to the Insolvency Act 1986 reversing the affect of this judgment: s.176ZA Insolvency Act 1986.
[13] See further:
[14] Milman Priority.
[15] On these alternatives to pari passu see: Finch, V. Corporate insolvency law: perspectives and principles. Cambridge University Press, Cambridge, 2009, at pages 666 to 674 and her earlier: Finch, V. Is pari passu passé? (2000) Insolvency lawyer, 5 (Oct). pp. 194-210. ISSN 1350-5211
[16] Milman Priority
[17] IS Consultation
[18] IS Consultation para 2.33

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