The pari passu principle

Abstract

The pari passu principle is often said to constitute a fundamental rule of corporate insolvency law. It holds that, in a winding up, unsecured creditors shall share rateably in those assets of the insolvent company that are available for residual distribution. In what might be called the ‘strong’ version of pari passu , ‘rateably’ means that unsecured creditors, as a whole, are paid pro rata to the extent of their pre-insolvency claims. This contrasts with the ‘weak’ version of pari passu in which such creditors share rateably within the particular ranking that they are given on insolvency by the law – a system of ranking that draws distinctions between different classes of unsecured creditors (for example, preferred employees and ordinary unsecured creditors). This chapter and the one following consider whether the pari passu principle (hereafter discussed and referred to in its strong version unless otherwise stated) operates in an efficient and fair manner and whether there is a case for approaching post-insolvency distribution in a different way. Issues of accountability and expertise will not be addressed since pari passu is a substantive rule governing the distribution of goods and little is to be gained by asking whether a principle is, in itself, accountable or expert. Whether insolvency principles are administered accountably and expertly are matters dealt with in other chapters. As noted in chapter 13, creditors are free, prior to winding up, to pursue whatever enforcement measures are open to them: for example, repossession of goods or judgment execution. Indeed, the race goes to the swiftest. Liquidation puts an end to the race as the liquidator is responsible for the orderly realisation of assets for the benefit of all unsecured creditors and for distributing the net proceeds pari passu . The pari passu principle, however, can only apply to unencumbered assets of the insolvent company that are available for distribution. If a company holds property as a bailee or trustee, that property is not part of the common pool for distribution. Similarly, goods possessed by the company under a contract of sale that reserves title to the seller until completion of payment do not form part of the pool.