The Pari Passu Principle and its Relationship with Other Methods of Insolvency Distribution

This chapter delves into the nature of the pari passu principle, which supposedly requires all unsecured claims of an insolvent company to be met proportionately from the insolvent's estate. It argues that there is widespread misunderstanding about the role of this principle. The principle is claimed by commentators to be responsible for the orderliness of corporate liquidation, to explain and justify the collectivity of the liquidation regime and the rules providing for the avoidance (or more accurately, adjustment) of certain types of transaction, and to ensure fairness to all of the insolvent's creditors. The central claim in the chapter —that none of these functions can properly be attributed to the principle —is illustrated by empirical evidence of how the estates of insolvent companies are in fact distributed, the statutory provisions which help put the principle in its proper place, and the case law said to support it. The Authentic Consent Model is deployed to demonstrate that the pari passu rule —often called the ‘equality’ principle—has little to do with ‘real’ equality. The chapter shows what it claims is the actual role of ‘formal’ equality of the sort enshrined in the ‘equality’ principle.