Bypassingpari passu

Abstract

The main potential bases for supporting pari passu as a principle of corporate insolvency law are that it provides an efficient and a fair ground rule for allocating the residual insolvency estate. As was seen in the last chapter, however, exceptions to pari passu produce a principle that is unduly complex and uncertain. This chapter considers the extent to which pari passu can be bypassed and a central issue will be whether bypassing is so easily and frequently practised that the value of pari passu is undermined. Here, therefore, we return to the second of the two key problems that corporate insolvency law faces in this area: how a company's insolvent estate is to be constructed. As a preliminary point, it should be emphasised that the law does not readily countenance contracting out of collective arrangements for dealing with the insolvency estate. It was noted in chapter 14 that parties may be allowed by the courts to enter into contracts in a manner that worsens their status in the distribution of an insolvent company's estate. What the courts will not do is allow creditors to ‘contract with [their] debtor [to] enjoy some advantage in a bankruptcy or winding up which is denied to other creditors’. The House of Lords made it clear in the British Eagle case that this would be contrary to public policy whether or not the contractual provision was expressed to take effect only on insolvency. Effect would not be given to a contractual arrangement that attempted to avoid collectivity by purporting to allow certain creditors to opt out of pari passu distribution of the residual estate to their advantage. British Eagle was a member of an International Air Transport Association (IATA) clearing house scheme in which moneys due from airlines to each other would be netted out each month. When British Eagle went into liquidation it owed money to a number of airlines but it had a claim against Air France, which the liquidator sought to recover.