Pari passu - passe, discrete or operational PDF

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Pari passu - passe, discrete or operational...

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Lecture 8 Housekeeping VITAL updates: Discussion Boards ZOOM Meetings – Friday 2pm Case summaries - including on Disclaimer of Onerous Property Twitter: @TribeBankruptcy #LAW373 Insolvency Song of the Week (ISOW) Spandau Ballet – “True” https://youtu.be/AR8D2yqgQ1U PARI PASSU – a thesis: “The pari passu principle has never existed as a fundamental principle within anything other than a small set of discrete provisions dealing with Tudor bankruptcy. The existence of imprisonment for debt as a debtor treatment and by extension imprisoned debtors’ creditor treatment has meant that certain creditors have always been favoured over others whether within or without a bankruptcy jurisdiction.”

Sherlock homes pipe picture A. Aims of Pari Passu? Aims: Fairness/equality of treatment. Spread of social and economic costs. e.g. liquidation of a large scale plc can have a domino effect causing others to go into insolvent liquidation – if we allow a race to the bottom we will cause a chain of failed enterprises. A. The Reality of Modern Insolvency Law and pari passu Certain individuals are not affected by pari passu, e.g.: Secured Creditors – rights in rem – liquidation and bankruptcy do not interfere with the security rights of a secured creditor Those whose claims are able to be classed as expenses of the winding up Certain unsecured creditors entitled to preferential treatment. s.144/s.436 IA86 operation – unencumbered assets only Who is affected by pari passu? Unsecured creditors range from: larger, repeat unsecured creditors such as HM Revenue and Customs (HMRC) (FOR NOW!) large landlords (in England and Wales), to customers, trade creditors,

Employees. Why are un-secureds important? …even a small increase in the £80bn of unsecured credit extended by SME's will amount to many millions of pounds. “…unsecured creditors say that if their recovery rate from insolvency increased, they would extend more credit.” (The market for corporate insolvency practitioners. A market study. June 2010, OFT1245)

A. Distribution Provisions WINDING UP The order of distribution: Costs and expenses of the winding up Preferential debts Secured debts pursuant to floating charges Any preferential charge on goods distrained that arises pursuant to section 176(3) IA 86 General body of unsecured creditors Post-liquidation interest on debts Deferred creditors Any balance is divided among the contributories pursuant to the memorandum and articles.

History picture - full slide Pari Passu – Genesis Act Against such Persons As Do Make Bankrupts 1542: ‘a portion, rate and rate alike’ ‘all goods, chattels, lands, tenements and debts of every such offender shall be by the order and direction of the said lords employed and distributed amongst his creditors equally and indifferently rate for rate, in like manner and form as is afore declared’ Pari passu - Continuation in Statute Bankruptcy Act 1869 (personal side): Section 32: “32. The debts hereinafter mentioned shall be paid in priority to all other debts. Between themselves Preferential debts.“ Statutory preferences to the Crown 1890 corporate insolvency Pari passu - Continuation in Statute

Modern/current statutory example of pari passu: Insolvency Act 1986: s.107 – voluntary winding up – INCLUDING SOLVENT LIQUIDATION!!!! Provisions Applying to Both Kinds of Voluntary Winding Up 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. Pari Passu - nature As Professor Sir Roy Goode Q.C. has noted: ‘England’s very first bankruptcy statute….laid down the cardinal principle of distribution among creditors which, in theory, holds to this day’, from; Goode, R. The Death of Insolvency Law (1980) Co. Law 123. A. Pari Passu – strong rhetoric ‘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.’ from: Keay & Walton. Insolvency Law: Corporate and Personal. Pearson, 2003, at page 396 A. Pari Passu – strong rhetoric “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” From: C. Seligson. Preferences Under the Bankruptcy Act (1961) 15 Vanderbilt Law Review 115 Other supportive pari passu quotes: “Grundnorm” (Milman) “cardinal principle” (Goode Favourable) “Fundamental” (Patten, J in Re Airbase) “general principle” (UNCITRAL) “Fundamental” (Goode 3rd) “Foremost principle” (Keay & Walton Preferential) “fundamental rule” (Finch) Full slide picture of a shore of spit of land toprical sea beach A Sea Change in Thought? Pari Passu – negative rhetoric “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 at paragraph 233.

Pari Passu – negative rhetoric (the late) Professor Ian F. Fletcher QC: “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” From: Fletcher, IF. The Law of Insolvency. 3rd Ed. Sweet & Maxwell Ltd, 2002, p.659. Negative pari passu quotes: “crude standard” (Milman) “One of many rules” (Chan Ho) “equality of misery” (Milman priority) “undermined the pari passu rule” (Goode Favourable) “although fundamental…is not immutable” (Patten, J in Re Airbase) “Passe” (Finch) ”gravely diminished” (Goode 3rd) “highfalutin insistence on pari passu’s role…rather hyperbolic” (Chan Ho, Swansong) “...and though pari passu’s apologists may continue to calcify their self-affirming echo chamber their voices richocet aimlessley in the hollow within” (Chan Ho).

Look Chan Ho. Review Article: Goode’s Swan Song to Corporate Insolvency Law (2006) 17 European Business Law Review, Issue 6, pp. 1727–1752. Professor Sir Roy Goode QC, St. John’s College, University of Oxford Pari Passu – strong rhetoric Professor Vanessa Finch: Versions of pari passu: Strong Weak Orthodox Multi-layered Finch, V. Is Pari Passu Passe [2000] Insolvency Lawyer, 5(Oct), 194-210. Pari Passu – negative rhetoric Dr. Riz Mokal:

“It is argued here that the pari passu principle is rather less important than it is sometimes made out to be.” “does not fulfil any of the functions often attributed to it” – similar to the rescue culture/administration and the Insolvency Narrow Regimes Thesis. Mokal, R. Priority as Pathology: The Pari Passu Myth [2001] CLJ, vol. 60(3), pp.581-621. C. The Reality of Modern Insolvency Law and pari passu recognition of pre-existing proprietary rights – therefore little for the unsecured to pari passu participate in. Pari passu….has been eroded significantly and remains only as a theoretical doctrine (Cork at paragraph 233). Statistics on unsecured creditor dividends OFT – 2009: 500 administrations, preferential creditors had the highest average recovery rate (83 per cent), followed by secured creditors (36 per cent) and unsecured creditors (4 per cent). Our analysis of Companies House data shows that unsecured creditors receive a return in approximately 20 per cent of administrations (based on 500 records). DTI/IS – 2000 (A Review of Company Rescue and Business Reconstruction Mechanisms, Report by the Review Group, Department of Trade and Industry and HM Treasury May 2000). “administrative receivership… principally unsecured creditors, with very poor returns.” “When formal insolvency ensues average recovery rates are: 77% for the bank; 27% for preferential creditors; and virtually nil for unsecured creditors” C. The Reality of Modern Insolvency Law and pari passu Therefore: ‘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’

TRUE AND FALSE exceptions to pari passu TRUE! True! ”deviations from the normal rule” Set-off Utility companies Post-liquidation creditors 19 different types of preferential claim

Claims of deferred creditors D. Exceptions to pari passu True Exceptions Set-off Insolvent liquidations – r.4.90 (mutuality) Bankruptcies – s.323 IA 86 Stein v. Blake [1996] 1 AC 243 Cannot contract out of set-off - National Westminster Bank Ltd v. Halesowen [1972] AC 785 Allowed as exception to pari passu rule for reasons of policy and justice Parties “compelled to breach the pari passu principle” D. Exceptions to pari passu True Exceptions, cont’d Debt Subordination Creditors attempts to circumvent the statutory regime of distribution Creditors agree to defer claims to the claims of others

D. Exceptions to pari passu True Exceptions Debt Subordination, CONTINUED BUT DOES THIS APPRECIATE COMMERCIAL REALITY??? i.e. someone prepared to lend to help the company try and recover, but only if the company and other creditors will grant them higher distribution rights the other creditors will agree because they will get more back hopefully if the company is allowed to continue and survive. Contracting Out British Eagle International Air Lines v. Compagnie Nationale Air France [1975] 1 WLR 758

IATA Lord Morris of Borth-y-Gest’s opinion Contracting Out, cont’d Belmont Park Investments Pty Ltd and others v BNY Corporate Trustee Services Ltd and another (Revenue and Customs Comrs and another intervening) [2012] AC 383

The Anti-deprivation principle See Lord Collins’ (pictured) judgment D. Exceptions to pari passu True Exceptions Post liquidation expenses Pre-preferential status Costs and expenses of the liquidation Treated in priority: s. 115 Insolvency Act 1986 (voluntary liquidation) s.233(2)(a) Insolvency Act 1986 – continued supply suppliers given priority D. Exceptions to pari passu True Exceptions Preferential Claims - 251 Abolition of Crown preference The following paragraphs of Schedule 6 to the Insolvency Act 1986 (categories of preferential debts) shall cease to have effect— paragraphs 1 and 2 (debts due to Inland Revenue), paragraphs 3 to 5C (debts due to Customs and Excise), and paragraphs 6 and 7 (social security contributions). THEREFORE CATEGORIES OF PREFERENTIAL DEBT STILL REMAINING????? i.e. not abolished by the Enterprise Act? Three categories that rank pari passu as between themselves: Contributions to occupational pension schemes Remuneration owed to past or current employees – limited to £800 per claimant Levies on coal and steel. FALSE! False! Retention of Title (Romalpa) Trusts Fixed and Floating charges Liens D. Exceptions to pari passu False Exceptions Romalpa Clause Claimants (right to retain title) – property does not belong to the company – therefore creditors not entitled to claim

Aluminium Industrie Vaassen BV v. Romalpa Aluminium Ltd [1976] 1 WLR 676 D. Exceptions to pari passu False Exceptions Property held on trust Prest v. Petrodel Resources Ltd [2013] UKSC 34. Re Farepak Food and Gifts Ltd (in administration) (2006) EWHC 3272 (HC). Re Goldcorp Exchange Ltd [1994] UKPC 3. On the interaction between trusts and insolvency see further: Chan Ho, L. Equity and insolvency, and: Addy, C. Equity and insolvency: a commentary, in, Turner, PG (Ed). Equity and Administration. Cambridge University Press, Cambridge, 2016. Swadling, W (Ed). The Quistclose Trust: Critical Essays. Hart Publishing, Oxford, 2004.

D. Exceptions to pari passu False Exceptions: Charges (legal or equitable) Re Panama (1870) LR 6 Ch App 83 (Giffard, LJ (pictured) – later Lord Halsbury) - an implied power to give security. Fixed charge: Particular property, e.g. most common - legal mortgage over land First to be paid out of the insolvent estate Charge holder consent for sale or dealing Also intangible property, what else class? Cont’d… D. Exceptions to pari passu False Exceptions: Charges (legal or equitable) Floating charge: (Cork, para104 majority use) Designated class of assets Debtor has a future interest Deal and dispose with the property in the ordinary course of business without chargeholders consent over whole undertaking Crystallisation - “an event occurs” e.g. winding up, receiver. Re Yorkshire Woolcombers Association Limited [1903] 2 Ch. 284. (Romer, LJ – pictured) Legal: conveyance/assignment at law Equitable: mere encumbrance, no transfer of possession or ownership D. Exceptions to pari passu Re Brumark Investments Ltd [2001] UKPC 28; [2001] 2 A.C. 710 (PC (NZ)) Re New Bullas Trading Ltd [1994] B.C.C. 36 (CA (Civ Div)) (see: Tribe, J. The Privy Council and Brumark: a lingering shadow over book debts (2001) Comp. Law, 22(10), 318-319.) Re Spectrum Plus Ltd [2005] UKHL 41. D. Exceptions to pari passu False Exceptions: Liens:

“Another delightful story involving Jekyll, a well-known wit, concerns the word lien in discussion before Eldon. He pronounced it lion, while Sir Arthur Piggott (at one time Attorney General) spoke of it as lean. The difference of pronunciation was chronicled by Jekyll in the following lines in which there is a sly reference to the reputed economy of his Lordship's establishment; Sir Arthur, Sir Arthur, why, what do you mean, By saying the chancellor's lion is lean? D'ye think that his kitchen's so bad as all that, That nothing within can ever get fat?” (Footnote: Foss, vol.VIII, p.225. In 1822 Basil Montagu produced, A Summary of the Law of Lien . An expanded American edition appeared in 1824, in: Tribe, J & Graham, D. Bankruptcy in Crisis – A Regency Saga: Part 2 – The Busy Bankruptcy Court (2004) 17 Insolv.Int, pp.150. ISSN: 0950-2645.

Alternatives to Pari passu Time? Ethical? Timeline and Waterfall Prism/Approach Viewing all our lectures and ideas through the prism of the Timeline and the Waterfall Finchian Measures, OR: Alternatives! Conclusion Is Pari Passu Passe? Consider whether pari passu could or should be replaced by a different principle. OR Not law reform but conceptualisation of how pari passu operates. If continued ”veneration” is inappropriate Makes us in turn consider: Which, if any, debts should be preferential?’...