Professor Riz Mokal's 2001 exposition of the function of pari passu in English insolvency law (Mokal, R.'Priority as Pathology: The Pari Passu Myth’ [2001] CLJ 581-621) and, Mr Look Chan Ho's 2006 review of Professor Sir Roy Goode QC's third edition (Ho, LC. 'Goode's swan song to corporate insolvency law' [2006] EBLR 1727), amongst other work, highlight a schism between two camps. There are those who view pari passu as being 'fundamental', 'cardinal', 'a cornerstone', etc, and those, like the authors noted above, who view the role and reality of pari passu with more precision and as being merely one of a number of priority rules. There are of course different views of pari passu within this broader debate.
Professor Vanessa Finch and Mr Ho have both offered explanations of how pari passu works in reality. In the second edition of her treatise (Finch, Vanessa. Corporate insolvency law: perspectives and principles. Cambridge University Press, Cambridge, 2009) Finch defines a strong version of pari passu which operates so “that unsecured creditors as a whole, are paid pro rata to the extent of pre-insolvency claims.” Her weak version of pari passu operates so that “…such unsecured creditors share rateably within the particular ranking that draws distinctions between different classes of unsecured creditors (e.g. preferred employees and ordinary unsecured creditors).” Ho also divides his conceptualisation into two parts (see Goode's Swan Song - cited above). His orthodox version states that “all creditors of a particular pre-insolvency form (unsecured creditors as a group) share equally.” His multi-layered version operates so “creditors that are similarly ranked by insolvency law share equally within their given rank.” (Ho)
With these definitions and tensions in mind I thought it would be interesting to construct a table which compares pari passu rhetoric. The following table (and therefore this post) will grow as further sources are added:
For Pari Passu Being ‘Fundamental’, ‘Cardinal’, ‘Cornerstone’ etc | Against Pari Passu being a substantive principle |
“many of the existing distributional rules…are predicated on the pari passu grundnorm” (Milman Priority) | “the pari passu rule is a crude standard to apply in the legal system of the late 20th century.” (Milman Priority) |
‘England’s very first bankruptcy statute….laid down the cardinal principle of distribution among creditors which, in theory, holds to this day’ (Goode Death) | “pari passu is only one of the many rules of priority…it is thus wrong to say that the pari passu principle underpins collectivity.” (Ho Swan) |
‘equality of division among creditors is one of the (if not the most) fundamental principles of the law of insolvency and is at the very heart of the whole statutory schemes of bankruptcy and winding up’ (Keay & Walton) | “although the pari passu rule is retained there is little point in placing too much reliance on it if the company’s assets have been dissipated to such an extent that a faithful application of that principle of distribution only secures an equality of misery.” (Milman Priority) |
“The pari passu principle is often said to constitute a fundamental rule of corporate insolvency law” (Finch 2nd Ed). | “We consider that the principle of pari passu distribution of the insolvent’s estate should continue to form a cornerstone of any new insolvency legislation…We accept that no one should be able to contract out of insolvency law, and pari passu distribution in particular.” (Cork Report) |
“Equality is equity. That maxim is a theme of bankruptcy administration – one of the cornerstones of the bankruptcy structure. All persons similarly situated are entitled to equality in treatment in the distribution of the assets of the bankrupt estate” (Seligson preferences) | “It would be a serious misconception to suppose that the pari passu principle operates in a comprehensive way…..the pari passu principle is applied sequentially in relation to certain, discrete groups of claims, ranked into categories according to a fixed system of priorities” (Fletcher 3rd ed) |
“107 Distribution of company’s property Subject to the provisions of this Act as to preferential payments, the company’s property in a voluntary winding up shall on the winding up be applied in satisfaction of the company’s liabilities pari passu and, subject to that application, shall (unless the articles otherwise provide) be distributed among the members according to their rights and interests in the company.” (IA86) | ‘the pari passu principle, rather than being the all-prevailing rule that it is supposed to be, is in fact more like a convenient default principle’ (Fletcher 3rd ed) |
“It is a cardinal principle of insolvency law that the claims of creditors shall rank pari passu and that dividends shall be distributed rateably: share and share alike.” (Goode Favourable) | “In the light of these pronouncements from the highest courts in the land in favour of the pari passu rule [British Eagle, etc] it is perhaps surprising that attempts to circumvent it have proved so successful in practice in the 1970s.” (Milman Priority) |
“Since the paru passu principle has been recognised so widely and for so long as vital, and since it serves such desirable aims as orderliness in liquidation and fairness to all creditors, any deviation from it must be a cause for concern.” (Mokal Myth) | “In many jurisdictions three developments have occurred which together have largely undermined the pari passu rule.” (Goode Favourable) |
“the pari passu rule although fundamental is not immutable and its seems to me that in this case its application has necessarily to be restricted if section 176A is to have its desired economic effect.” (Patten, J in Re Airbase) | “in the face of these provisions the pari passu rule is necessarily modified so as to differentiate between unsecured creditors with no form of security and the unsecured claims of secured creditors…the pari passu rule although fundamental is not immutable and its seems to me that in this case its application has necessarily to be restricted if section 176A is to have its desired economic effect.” (Patten, J in Re Airbase) |
“…they can be said to fall outside the pari passu rule rather than constitute true exceptions” (Finch 1st Ed) | “in the end one suspects that the pari passu rule has been adopted by the courts as a convenient ‘fall back’ position that avoids the necessity of making difficult choices where the legislature has failed to take the initiative.” (Milman Priority) |
British Eagle International Air Lines Ltd v. Campagnie Nationale Air France [1975] 1 WLR 758, Lord Cross: “such a ‘contracting out’ [of pari passu] must, to my mind, be contrary to public policy.” | “Is Pari Passue Passe?” (Finch passe) |
“…insolvency law should provide, as a general principle, that similarly ranked claims are paid pari passu.” (UNCITRAL, 2005). | “The principle of pari passu distribution…has been gravely diminished, first by the extensive range of security rights and analogous devices that have evolved over the years, and, secondly by a massive expansion of the range of debts made preferential by statute.” (Goode 3rd) |
“The most fundamental principle of insolvency law is that of pari passu distribution.” (Goode 3rd) | “One cannot help wondering why Goode has to resort to highfalutin insistence on pari passu’s role, when all he means is the principle only has some practical importance and only in a negative sense. It is difficult not to see such repeated and emphatic assertions about the principle’s centrality, fundamentality and all-pervasiveness as rather hyperbolic.” (Ho Swan) |
“It is a fundamental principle of insolvency law…that the debtor’s assets are to be distributed pari passu.” (Goode 3rd) | “Goode’s argument merely boils down to this: Many people say it…Instead of being a victim of the echo chamber of authority, Goode should be the powerful voice of reason that punctuates the echo chamber. For good arguments rest on reason, and not merely ducking behind authority. Authority cannot militate indefinitely against reason. Reason is like quicksilver – it will stream to the surface through any available opening. When reason streams upwards, the pari passu authority evaporates into the ether.” (Ho Swan) |
“The pari passu principle is one of the most fundamental principles of corporate insolvency law.” (Goode 3rd) | “In sum, saying the pari pass principle is fundamental does not make it so. Saying pari passu underlies insolvency practice does not make it so. Avowing pari passu’s importance merely because others do so certainly does not make it so. And though pari passu’s apologists may continue to calcify their self-affirming echo chamber, their voices ricochet aimlessly in the hollow within.” (Ho Swan). |
“The principle of pari passu distribution if assets among ordinary unsecured creditors…has been developed by the courts into a fundamental concept of insolvency law…” (Goode 3rd) | “the principle of pari passu distribution has been greatly eroded during the last century or so until today it remains as a theoretical doctrine only, with scarcely any application in real life.” (Cork Report) |
“The normal rule in a corporate insolvency is that all creditors are treated on an equal footing – pari passu – and share in insolvency assets pro rata according to their pre-insolvency entitlements…” (Finch Security). | “but now pari passu is not a rule or a restriction or a standard.” (Mokal Myth) |
Pari passu as “the foremost principle in the law of insolvency around the world.” (Keay & Walton Preferential) | “The pari passu principle, then, is one manifestation of formal equality in insolvency law. However it is not the only one” (Mokal Myth) |
“It is argued here that the pari passu principle is rather less important than it is sometimes made out to be.” (Mokal Myth) | |
“It [pari passu] does not fulfil any of the functions often attributed to it.” (Mokal Myth) | |
“It [pari passu] does not constitute an accurate description of how the assets of insolvent companies are in fact distributed.” (Mokal Myth) | |
“the principle has nothing to do with fairness in liquidation.” (Mokal Myth) |
Picture Credit: http://rebeccasward.com/images/thingz/3d_pie_chart.jpg
Comments