Priority As Pathology The Pari Passu Myth

Editorial Committee of the Cambridge Law Journal
Priority as Pathology: The pari passu Myth

Author(s): Rizwaan Jameel Mokal
Source: The Cambridge Law Journal, Vol. 60, No. 3 (Nov., 2001), pp. 581-621
Published by: Cambridge University Press on behalf of Editorial Committee of the Cambridge Law Journal
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Callarid,geLz71s
Jorsal, 60(3),November2QOI,pp. 581-621
PrinteSi 1 CreatBriritl
PRIORITY AS PATHOLOGY:THE PARI PASSU

MYTH
RIZWAAN
JAMEEL
MOKAL*
1. JNTRODUCrlON
MANYa challengeto the diSerentpriorities(lccordedto diSerenttypes
of claim in a company'sinsolvencybeginswith clnincKlntCltion of the
pari passu principle. Finch states (on the second pclge of her
encyclopaedicrecentstudy on securedcredit):6'Thenormsllrule in a
corporate insolvency is that all creditorsare treated on an equal
footing pari passlt and share in insolvency assets pro rata
according to their pre-insolvencyentitlementsor the sums they slre
owed. Securityavoids the eSectsof pclriptlssudistributionby creating
rights that have priority over the claims of unsecuredcreditors."i
Bridge sees an inherent tension between the "two fundamental
principles of credit and insolvency law", thCltof lhe freedom of
contractwhich allows one to bargainfor priority,clndthe mandatory
paripclssa AndCranston,afterconsideringand discounting
principle.2
lesser objections to the existence of securedcredit, concludes thclt

"thereare other social policiesantipatheticalto extensivesecurity,like
thepri passu principle[,]whichare less easilyrefuted".3
The pari passu principleis said to be "the foremost principlein
the law of insolvency around the world".4CommentCltors claim to
have found this principle entrenchedin jurisdictionsfclr removed
* lSecturer in Laws, Universily Collcge London. I .Im gr.lleStil tv Alison Cl;lrkc for her
invalu;lble help, to D.ln Prentice for thoughtful criticism aInd cncouragcincllt, atl1dto John
Armour, Michael Bridge, lan lvlelcher, Slophen Gucst, Look Ho, Iom;ls Vi;ll, .nd ;In
tnnonymous referec for illumin tting comments. The YiCWS cxprcssed zInd tl1c mist;lkcs m,lde
are minesilone.
| VenessxsFinch, "Securily, insolYcncy ;Ind risk" (1999) 62 hl L.R. 633, 634 (Snolnotcs omitted).
It is unclear whether Finch is making an all-inclusive claim: th;st the norm,tl rulc is thal (111
trefilors, of whatever typc, ,lre trcated eqzlully. If she is, lhen lhc cl;lim is tto bro.ld; lherc is
not, nor has there ever becn, any such "normal rule". Only thosc in "rel;llive positions of
c4uality", judged by refcrencc to the gener.tl (non-insolvency) law, arc covcred by thc principic;
sce Odit3h, "Assets and the trc.tmenl Of cl.lims in insolYcncy" (1992) 108 L.Q.K. 459, 463.
This point is t tken up again below. See .llso Goode, 'is the l;lw loo f;svour;bic to secured
creditors?" (1983-4) 8 Cstnadian Business L.J. 53, 58-S9, ;nd Goodc, "Proprict.ry righis .Ind
unsecured creditors", in B.lrry Rider (ed.), Tlle Reuls11 vf COIT1P(JZI!P
LzzlzX(London, Kluwer,
1998), 183, 184.
Michael Bridge, "Thc Qtli.stcloseTrust in a world nf secured tr.lns;lclions" (1')92) 12 O.J L.S.
333, 340.
3 Ross Cranston, Prisiciple.voJ Baking Lalt (Oxford, Clarendon, 1997), p. 4q,6.
4 Sce the excellent study by Andrew Keay .tnd Peter W.llton, "Tilc prefercnti.ll debts regimc in
1iquid|tion law: in the public in(ercsl?" [1999JC.f.i.L.R. 84, 85.
581
582 The Cambridge Law Journal [2001]
from ours in geography and time.5 In English law, statute itself

seems to confirm Finch's "normal rule", that all creditors of an
insolvent company are to be treated "equally" by having their pre-
insolvency claims abated rate and rate alike.6 The principle is
thought to be "all-pervasive", and its effect is to "strike down all
agreements which have as their object or result the unfair
preference of a particular creditor by removal from the estate on
winding up of an asset that would otherwise have been available
for the general body of creditors".7 The Cork Committee, despite
noting significant exceptions to the principle, reiterated its
fundamental importance.8 The principle is said to be supported
both by the need for an orderly liquidation of insolvents' estates,
and by requirements of fairness. So it is not surprising that its
invocation as the starting point for, say, the debate on the priority
of secured or preferential claims, weights the argument in a
particular way. Since the pari 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. It seems to follow
therefore that: "Before a creditor is entitled to claim a preferred
position it must be demonstrated that deviation from the inveterate
and equitable pari passu principle is warranted".9 On this view, the
priority, say, of secured or preferential claims is an abnormality, a
pathology to be diagnosed and controlled, perhaps even "cured".
Since "equality" is the norm, the onus must be on those supporting
differing priorities to justify their claim. To the extent that their
efforts are unpersuasive, the case for priority must be considered
not established, and the "default principle" of "equality" must
prevail.10
This paper seeks to overturn this order of things. It is argued
here that the pari passu principle is rather less important than it is
sometimes made out to be, and does not fulfil any of the functions
often attributed to it. It does not constitute an accurate description
of how the assets of insolvent companies are in fact distributed. It
' Scc
e.g. J. Garrido,"The distributionalquestionin insolvency:comparativeaspects"(1995)4
I.I.R. 25, 29.
'
InsolvencyAct 1986 (hcreaftcr,"IA") s. 107 (voluntaryliquidation;however, the section
begins:"Subjectlo the provisionsof this Act as to preferentialpayments...") and Insolvency
Rules 1986, 4.181(1) (compulsoryliquidation).The principlecan bc traccdback to the first
attemptlo deal with insolvencyissues by statute;see 34 & 35 Hen. 8 c. 4, s. 2.
Goode, Principleof CorporatcInsolvencyLaw (London, Sweet & Maxwell, 1997) (2nd cd.)
p. 142.
(hcreaftcr,Insolvency),
InsolvencyLawand Practice(Cmnd.8558, 1982)(hcreaftcr,"CorkReport"),para. 1220.
Kcayand Walton,"Preferential debts",p. 92.
Ibid. The Report by the Review Group, A Review of Company Rescue and Business
Rcconstruction Mechanisms(DT1, May 2000) rciteratcsthe same orthodoxy;scc p. 10 para.
24.
C.L.J. The Pari Passu Myth 583
has no to play in ensuring

role an orderly winding up of such
companies. Nor
does it underlie, explain, or justify distinctive
features of the formal insolvency regime, notably, its collectivity.
The case-law said to support the pari passu principle serves actually
to undermine its importance. And the principle has nothing to do
with fairness in liquidation. The paper concludes by examining the
actual of the principle.
role If the arguments made here succeed,
then the initial onus of justifying their position shifts from those
arguing in favour of the priority of secured and preferential
creditors etc, to those who support a more "equal" distribution of
the insolvent's estate.11
Since there is confusion in the literature about the correct
identification of the pari passu principle, it would be useful to begin
with a word on terminology. The pari passu principle, as it appears in
(corporate) insolvency law, has a fairly specific purpose. It seeks to be
informative, to answer the broad question how insolvency law decides
on the treatment of different types of creditor. The answer offered by
this principle is that insolvency law "takes them exactly as it finds
them".12 Put differently, creditors holding formally similar claims
under non-insolvency law are to be paid back the same proportion of
their debt in their debtor's insolvency.13 The pari passu principle, then,
is one manifestation of formal equality in insolvency law.
However, it is not the only one. As explained in the following
Section, insolvency law itself creates exceptions to the pari passu
principle, the most notable for our purposes being that in favour of
preferential creditors. Some of the claims held by the insolvent's
employees, and some tax liabilities owed by the insolvent, rank
ahead of general claims, such that all preferential debts must be
discharged in full before general unsecured creditors are paid
anything.14 The factor which causes confusion is that preferential
claims also abate rateably as amongst themselves. Some
commentators have therefore been led to regard the treatment of
preferential creditors inter se as another application of the same
pari passu principle.15 But this view is unsound in several different
1 Referencesto
'equality"(withinquotationmarks)are to bc readas indicating/o/vw//equality,
dcfinedfor the momentas that understanding of equalityespouscdby the supportcrsof the
pari passu principle;see e.g. the quotationfrom Finch which opened this Section.This is to
be contrastcdwith the true equality which results from treating people as cquals. This is
in Section5, below.
! explained
Re Smith,Knight& Co., ex p. Ashbury(1868) L.R. 5 Eq. 223, at 226, per Lord RomillyM.R.
1 See
e.g. Worsleyv. Demattos(1758) 1 Burr.467; 97 E.R. 407, 412, per Lord Mansficld,who
identifiedas one of the purposesof bankruptcylaw an "equaldistributionamong creditors
who equally gave a generalpersonalcreditto the bunkrupt"(emphasisadded). So personal
creditorsbut not proprietaryones (both types defined by non-insolvencylaw) are to rank
equallyinterse for the purposeof bankruptcydistribution.
[ IA, s. 175.
For example,Goodc, Insolvency,p. 156, states that "preferential
debts rankpari passuamong
themselves".See also Finch, "Is pari passu passe?"[2000] InsolvencyLawyer 194, 194 and
ways. Most obviously, it ignores the received understanding of the

nature of the "equality" principle, that the determination of
"equality" is to be made by /;re-insolvency law.16 Second, it reduces
the principle to triviality, since the principle now provides simply
that those determined by insolvency law to be equal are to be
treated equally by insolvency law. But now pari passu is not a rule
or a restriction or a standard. It neither imposes a requirement
which insolvency law must fulfil, nor does it shape that law in any
way. It is merely a description of what insolvency law actually
does, and it fits perfectly with whatever scheme of priorities that
law might devise. As a triviality the principle is harmless, but for
the same reason it is also uninformative. It no longer says anything
about why insolvency law chooses to declare certain creditors to be
"equals". Finally though, and confusingly, the commentators who
regard the distribution to preferential creditors inter se to be
governed by the pari passu principle, still accept that the existence
of preferential claims itself constitutes an exception to that
principle.17 Viewed thus, their position becomes something of a
paradox: the treatment of preferred claims is both an exception to,
and yet an application of the pari passu rule! Most readers would
find it difficult to imagine too many other situations which both
exemplify and contradict one and the same principle.
It is suggested that this view of the "equality" principle, which
renders the principle both trivial and paradoxical, is unhelpful and
should be abandoned. A little care with terminology dissolves the
paradox and restores the principle to its roots. A distinction must
be drawn between the sort of formal equality represented by pari
passu (the equality of creditors as determined by the pre-insolvency
form of their
claim) and other manifestations of formal equality
introduced by insolvency law itself (such as that which holds
between some employee- and some Crown-claims, but not between
these and claims held by a trade creditor, say). Accordingly,
references to pari passu in this paper are to be understood in line
with this distinction. To break the monotony of recurrence, "the
'equality' rule (or principle)" will sometimes be employed as
synonymous with pari passu. Formal equality other than that
enshrined in the pari passu principle will be clearly identified by the
context.
199, includingfn. 36; the dclinitionof the principlethat she cmbracesin this articleseems to
be inconsistentwith the one quotcdat the beginningof this Section.
See the discussionabove,and especiallyRe Smith.Knight& Co. (1868) L.R. 5 Eq. 223, 226.
See Goode, Insolvency, pp. 152and 156,and Finch,"Paripassu",pp. 194and 195.
2. The Myth of Pari Passu Distribution
Despite the hold

exercised by the "equality" principle on the
imagination of
insolvency lawyers, the principle is sometimes
acknowledged, as a descriptive matter, not to have too much
application in the real world. After proclaiming that the principle is
"fundamental and all-pervasive", Goode adds that "This, at least,
is the theory of insolvency law".18 Fidelis Oditah, who also regards
it as "fundamental", explains at the same time that the pari passu
norm is "shallow", since it is subject to numerous exceptions, and
since it does not in itself acknowledge the "obvious truth" that
insolvency law often exempts those
holding certain dissimilar pre-
insolvency rights from to
having submit to an "equal"
distribution.'9 The Cork Report noted that rateable distribution
among creditors is rarely achieved.20 And Keay and Walton state
that the "equality" principle is "nothing more, and has little
relevance, other than to act as a convenient default principle".21
It would be instructive to consider just how extensive these
deviations from the "normal
rule" really are. Disregard for the
moment the given to those with a consensual
priority property
right. Goode explains that the treatment of secured creditors,
suppliers of goods under reservation of title (ROT) clauses, and
"creditors for whom the [debtor] company holds assets on trust",
all are not to be considered true exceptions to the pari passu
principle, since "such assets do not belong to the company and
thus do not fail to be distributed among creditors on any basis".22
Some five categories of "true exceptions" established by statute can
still be identified.23
First are rights of insolvency set-off, which are wider in effect than
those available outside insolvency. Set-off applies whenever there
have been mutual credits, mutual debits or other mutual dealings,
before the onset of liquidation, between the debtor and any of its
creditors.24 The cross-claims need not impeach the debt owed to the
insolvent, so long as the requirement of mutuality is satisfied.25 "The
right of set-off on insolvency represents a major incursion into the
pari passu principle", since to the extent that there are mutual credits,
18 142-143.
19Insolvency,pp.
"Assets",p. 463.
20 Para. 1396.
21 "Preferential
debts", p. 94. It is suggestedbelow that even this might be ovcr-statingthe
** principle's
significance.
Insolvency,p. 152. Satisfactoryor not, the samereasoningappliesto hirc-purchasc
agreements
and financeleases.
23 Ibid.Oditahdiscussesfour scc 466-468.
24 "importantexceptions"; "Assets",pp.
Rules 1986.r. 4.90.
25 Insolvency
Peat v. Jones(1881) 8 Q.B.D. 147;MersevSteel & IronCo. v. Navtor.Benzon& Co. (1882)9
Q.B.D. 648, (1884) 9 App. Cas. 434.
586 Tl1e Cs?1hJitlgcsL wt}JottJtwal [200I]
debits or otherdeclllngs,the creditorable to assertset-offrightsgets a

pl'0 {08t0 priority over others.26Whcltis especially significantgiven
our focus, this priorityis )w1alr1R/vzteclby the Legislature,27 clndoperates
z}utomcltically at the dclteof the winding-uporder without the need
for any interventionby either pclrty.28Parties, in other words, are
c(owspc>/letl to brelch the pori pl,vsz( principle.
Second, creditors whose claims arise after the winding-uporder
hcls been handed down are given a privileged position. Statute
provides thclttheir claims are to be trelted as part of the expenses
of liquidation, clre tllerefore to be given "pre-preferential"status
(ic. rslnkingsIhesldof preferentialcreditors), and are to be paid,
not proved.29 In additions, utility suppliers "may make it a
condition of the giving of the supply that the [liquidator]personally
guslrclntees the payment:of <ny chClrgesin respectof the supply'.30
A third (lnd related category is constittlted by pre-liquidation
creditors who can compel pclymentby virtue of their ability to
inflict certain types of harm on the insolvent estate. This csltegory
covers payments to ulvoid forfeiture of (z lease, distress or
terminationof (l contrclct.3lIn general, creditors whose continued
co-operwtionis desired by the liquidator may be able to extract
p>ymentsin respectof pre-insolvencydebts.3)
Then there clre preferential cl>wimsthemselves. These include
v.lrious taxes colSected by the debtor on behalf of the Crown,
including some PAYE deductions, unpaid VAT, unpaid crlr tax,
genercllbetting,bingo, (Indgslminglicence duties, some pool betting
duties, (ltid Unpclid SOCisil security contributions.33Levies on cosl
.Ind steel production, beer duty, Iottery duty, insurslncepremium
tKlX, .lir pClssenger duty clndlKlndfill tax hclveCllsobeen added to this
liSt.34 Then there are certKlindebts related to the insolvent's
employees. These include any stlms in retation to occupCltional
pension schemes, remunerationof employees Ltp to £800, clccrued
holiday pay, and clnysums loaned and used for the specificpurpose
of palyingemployees'remunerKltion.35
2' Golc, /Jyesl^'e'lt!'P 153
27 Nalli,,ll,,l [Mexl2ttBlstewnotk 1t,/. v. Eto/c9.vozlrew Ppc.s.silsorA-
ts2(i A.v.elh/ies.s Ll(l. [19721 A.C. 785
(|-IL); scc the (liSCttSSiOIl ill Scclion 4, helow.
2N Stevj, \'. BltlA-c[19961 1 A.C. 243 (HE); Gê v. Mcllt,te (1991) 171 C.L.R. ()09 (High Collrl or
Ausir;li.l). The rel;tionship belwcen rights Of insolvel)cy set-off .lnd lhose of sccurcd creditors
hoIdil; chrgc-ta,lcks is itscIS zI vexed olle; fr the vicw t}lull ill CCrt.lill CirCIllnSt.lilC2S, SCl-o¢
shotII(3oper.{tc dcspitc thc exisicncc ort ch.lrsc-bilck SccMok;ll, Rcsolvtilg lhe 1t1S Fslzt )E7.
'p.sr;dc)x'" [19991 C.f.i.L.R. 10().
2} 1^, SS. | 15 (volulitury witiding-lip) 156; IR, rr. 12.2 aIlid4.218.
3" IA, s. 233(2)(;l).
3| Goodc, IIlV6/I'E'tlE;', p. 15fi.
J; Odil;lI "Asscts", p. 4fi7, Cililig Rc Lelti & G). Llbl. [19191 I Ch. 416 .1s .tn cxalmple.
3' 1A, Scil. 6.
34 Zhi.f.
Ss /I)i,l. Scc gencr;lly thc llsicfill sililim.lry in Kc.ly .zIld W.llton, 'Prefcrcilti;l cichts", pp. 91-92.
C.L.J. Tlte Pari Passu Mtit 587
Finally,varioustypes of debt have been deferredby statute.

Theseincludedebtsowed by the insolventto sl ditector(including
shadowdirector)found liablefor wronglbulor frsludulenttrading,
and ordered to be deferred by the court.36Clclimsheld by the
debtor's shareholders or other members (/ll membels (llso f<11l
underthis head.37
So the claims of creditors able to assert set-oW, utility
companies,post-liqusdationcreditors,pre-liquidationcreditorswith
post-insolvencyleverage, nineteen ditTerenttypes of preferential
claims,and claims of deferredcreditors,a11fslll outside the purview
of the pBSSl principle.And even these "deviations"from the
pcBri
"normal rule", while patently substantial, miglll ill flct be

"something of a minor qualification"to the ''equcllity9norm.38
There are numerous other types of creditor not clSected by it.
Under certain circumstances, this includes CklilllS 11eld by
accountants, solicitors, stockbrokers, fclctors (lnd b;nkers, a11 of
whom might be able to benefit from common law liens which arise
by operation of Statute gives the unpaid seller sl lien on the
law.39
goods sold, (lnd rights of stoppage in trclnsit.4() If the insolvent WClS

insured,sIparty injuredby its actions (a tort creditor)is subrogslted
to its rights against the insurer.4'lf the lislbilityin question (rose
under circumstancesgoverned by the Road TrslfficAct 198S, the
insurer might be liable to the tort creditor even in those
circumstanceswhere it would have been sableto clvoidor cclncelthe
policy as against the insured.42This of course continues to
disregardthose able to assert consensusllproperty rights in some
assets ostensiblywithin the insolventXs estslte.
Consider these principles in the light of recent dclta on the
sources of externsllfunding for smclll to medsum sized enterprises
(SMEs),43which provide insolvency k1W with IllOSt of ilS business.44
In a survey covering the period 1995-1997, 47°/0 this WrlS lOUlid Or
to have been providedby bslnks(who oftell tslke security), 27% by

hire purchase/leasingfirms(proprietclry rights), 60/o by p.lrtIlers (lnd
shareholders(may or may not be deferred by Sltittitld) 6% by
factoring businesses(liens and consensusll propriettlry r ights), 4°/
Sh IA s. 213 (fraudlllent lrlding) 214 (wrongfill lr.ding). s. 215(4).

}7 IA? 8, 74(2)(f )
38 Odit.sh, Assels 8 p 467
39 Iti(t.. p. 469 fn. 67, citing S}lCJ/ v E(/til! (29lh ed.), Ch.lp. 10.
4() SAiC of Goods Acl 1979, ss. 39 *Il)d4196.
41 Third Pilrtics (Rights Agstinsl Insllrers) Act 1930, s.

1(1).
4- SCC S. 151(5).
43 Fizlch provides ;1 useflll sulnln.lry; .see "Security", p. 63f, .Ind lhe sotlrccs she citcs il1 111.IX..
*sf
44 Thc Associ;llion of Busincss Recovery Prclfessioll.lls (or A13RI'; forlllerly Slll), Slarze!
BlJ.siJ1X*s.v col!erlS iR7 tlze UK: 91/1StJrzet(2001,;sv.il;lblc .t URL: WWW.SPl.OKG.UK/91hc/),
p. 7 shows lh;t il1 lhe yeslr to Juxlc 15)99,88.5'Mo Of comp.lnicSwhich bcctillicsubjcct lO s1

form;ll insolvency procceding, h;ld ; turnover Iess th.ln £5m.
by other individuals, 4% by other sources, 3% by venture

capitalists (equity claimants, hence ranking below debtors), and 1%
by trade customers (who have the option of setting up Kayford
trusts45). Also important, especially for small businesses, is trade
credit. By some estimates, stocks and fiows of trade credit are twice
the size of
bank credit.46 At least some (perhaps much) of the
credit in this category also generally fails beyond the application of
the "equality" norm. One survey (which, because of its age,
probably underestimates the extent to which ROTs are employed)
found that well over half the suppliers surveyed (59%) used ROT
clauses.47 This figure seems to rise dramaticaliy, the more troubled
the debtor in question.48
These are of course the sources from which firms raise capital
while they are solvent. These figures do not directly indicate the
composition of the overall debt of firms which are in financial
distress, or which are undergoing some formal insolvency
procedure. Intuitively, however, it would be surprising if the debt
outstanding when a firm became distressed generally had a
structure very different from the one mentioned above. And in fact
there is some fresh data which eonfirms this intuition. Julian
Franks and Oren Sussman have recently compiled a data set of
more than 500 firms which had bank debt, and which were in
financial distress.49 This eonfirms that the structure of debt of the
firms in the "rescue units" of the three banks studied is very similar
to that for solvent firms as a whole.50
Even more significant is the fact that, in an overwhelming
majority of formal insolvency proceedings, nothing is distributed to
general unsecured creditors (the only category of claimant truly
subject to the pari passu rule). It is estimated that there are zero
returns to them in 88% of administrative receiverships, 75% of
In re Kayford(in liq.) [1975}l W.L.R.279; for a criticaldiscussion,see Goodhartand Jones,
'The infiltrationof equitabledoctrineinto Englishcommerciallaw" (1980) 43 M.L.R. 489.
The Re Kayfordmethodseems to have been upheldby the Court of Appeal in Re Chelsea
CloistersLtd. (1981)41 P.&C.R.98, but that case is criticisedas **anexercisein discretionary
' justice" by Bridge,"Qidstclose",pp. 356-357.
Bank of England,Financefor Small Firms:A SeventhReport(January2000), p. 26 fn. 17,
referringto Singletonand Wilson,Sourcesand Use of ExternalFinance:An EmpiricalStudyof
UK SmallFirms.
J. "Thecommercialrealiliesof reservalionof titleclauses"[19891J.B.L. 220, 221.
1S. Spencer, Reservation Title Clauses
Whceler, of (Oxford,OUP, 1991),p. 5, found that in the fifteen
rcceivershipsand liquidationsstudied,92% of suppliershad employedsome sort of ROT
provision.
The Cycle of CorporateDistress.Rescueand Dissotution:A Studyof Small and MediumSize
UK Companies,Instituteof Financeand Accounting(LondonBusinessSchool)WorkingPaper
1306-2000, April 2000(publishedon 2.11.00).
For the three banksrcspectively,the mean debt owed to the types of creditorindicatcdas a
percentageof total outstandingdebt, was as follows:Main Bank 38.2%,49%, 41.9%;Trade
Creditors24%, 37.4%,40.2%;OtherFinancialInstitution2.3%, 2.8%, 7.5%;OtherCreditors
29.4%, 8.3%, 8%; "Owncr"-Dircctors 6.1%, 2.5%, 2.4%;see ibid., p. 8, Table 3. More on
this in the pcnullimatcSectionof this paper.
creditors* voluntary liquidations, and 78% of compulsory

liquidations. On average, they receive 7% of what they are owed.51
So while the matter is an empirical one, and while the position
would of course vary from debtor to insolvent debtor, the
discussion so far and these statistics show that most types of claim
either are or can be exempted from the application of the pari
passu principle. It is also likely that in most if not all liquidations,
hardly any claimant is paid pari passu. Given these reasonable
deductions, one might perhaps be forgiven for questioning whether
it is fair to describe the pari passu principle as "the normal rule in
a corporate insolvency".52 In fact, it is the differing priorities of
claims which seem to represent the rule. What seems certain is that,
in the distribution of the assets of insolvent estates, "equality"
between different types of claim must be very much the exception.
Put differently, even if unsecured claims other than preferential
claims form the bulk of the claims in most liquidations, most of the
available assets would not be distributed "equally". The pari passu
rule is supposed to govern distributions. It should be obvious,
however, that distribution in accordance with this rule is virtually
non-existent.53
Some readers would object that the discussion so far does little
more than state the obvious, since everyone knows the current law
leaves little room for anything to be distributed pari passu in an
overwhelming proportion of insolvencies. These readers dramatically
underestimate the extent to which insolvency scholarship still clings
to the pari passu myth. Leading insolvency scholars (and courts)
regularly assert that
this jurisdiction has a "pari passu insolvency
regime", that the "equality" rule has been varied "only slightly ... in
respect of personal claimants", that the "present law ... is disinclined
to force particular classes of creditors to shoulder greater burdens"
than others by causing derogations from the "equality" principle in
favour of the latter (or against the former).54 With respect, such
assertions very misleadingly push the pari passu principle to the fore
as currently the dominant method for the distribution of insolvent
estates. They are then used as premises in further analysis which in
turn is often (not always) distorted as a result. That is to be
51ABRP,
Survey,p. 18. This is supportedby the Franks-Sussman data, which shows that the
medianrecoveryrate for unsecuredcreditorsin a sampleof 27 administrative is
receiverships
0%; see 14, Table9, n. 1.
52To this Cycte,p.
author,"normal"indicatesa state of affairswhichis usual,regular,common,average,
or typical.
53The
implicationsof this distinctionbetween the constitutionof claims and the patternof
distributionis discussedfurtherin Section6 of this paper.
54These
quotationsare from Finchand Worthington,"Thepari passuprincipleand rankingof
restitutionaryrights",in Rose (ed.), Restitutionand Insolvency(Mansfield,Oxford,2000), 1,
pp. 14-15, 2 and 7, includingfn. 33 (emphasesadded).
590 Tlle CrIw?bl
ilge Lt111}
Jolarzaal [200 1]
repeetted. Muchof sciencecouldnot progresstill it had rejectedthe

fulsegeocentricpictureof the cosmos. In its rathermore modest
sphere,insolvencyscholarshipmustsomehowtearitselfClwayfrom
the equallyfulse view thCltthe "equality"principleoccupiesthe
centreof theinsolvencylawuniverse.
Still,let us tClkeseriouslythe objectionnotedabove.Perhslps the
discussionso far /wasw missedthe point.The claimthat priorityis a
pClthology mightnot be a descriptive one Clfter
all. Thosemakingit
might, on reflection,be willing to concede that the pri prls.su
prillciplereflectslittleof reality,which(theymightcome to clccept)
COllSiStS of widelydivergent prioritiesclccorded to differenttypesof
clslim.The critics of diSerentialprioritymight now argue the
;'equality"norm constitutesthe itlcvcllrIgainstwhich our existing
insolvencylslwmustbejudged,sinceit enshrinesdesirablegOcllS that
any reasonableinsolvencyregimemustattain.Devicltions frompeJri
psfs.szw
lre to be condemnedfor mking the attainmentof thosegoclls
mote unlikely,clndthey clreto be condemnedeven more precisely
beccluse theyareso widesprecld. It is to thisclaimthatwe nowturn.
3. THE IMMUNITY/PRIORITY
FALLACY
For English lawyers, it seems the primciryattraction of the pcwri
psl.sszprincipleis its KIbilityto provide for ctn orderly liquidation.
Goode makes the pOillt firlMly:
lt is this principleof rateXlbledistributionwhich marks ofTthe
rights of creditors in (1 winding up from their pre-liquidation
entitlements.Priorto winding up each creditoris free to pursue
whtever enforcementmectsures (Ireopen to him . . . The rulehere,
in the absenceof cininsolvencyproceeding,is that the racegoes to
the swiftest... Liquidsitionputs cinend to the rcice.The principle
firstcome first servedgives way to thcitof orderlyrealiscitionof
assets by the liquidatorfor the beneEtof(1ll unsecuredcreditors
sinddistribut;ionof the net proccedsptl iprls.se.55
Kecly sInd Walton see the principleas the embodiment of similar
virtues:
the whole sdea of /wcî pRJS.U distributionis to ensure pcirityof
benefitnno matter whcit resourcesone hcls-i f there were no
prlS'i pW.v.stldistributionwe would returnto the "fil-stcome, first
served" policy of mediclevaltimes, which saw those with the
grecitestresources(Indpower tclkingthe debtornsestcite.56
ss /,,.{s/|F1vZX
1;,p. 142.
5^'Kc.y sIlid W;litOIl, *'PrCfCrClilisIt(iCblSt', p. 95; wc .llso pp. 92-93. Bridgcollso rcg.lrdsthe
"t:qu;llily" prillciplc;1srcncctillglhc l.lw's inlercstin .*nordcrlyliqllidsltion;sec "Qislclz*.Vet'7
p. 340, thougll hc strikesii notc of sCcplicism Oll thc s.zmcp.lge:jtlst how 'fund.lmcnl.ll''
e:otsIdIhC principlctwc''whcnOllC [:nsl] look ... Soril ill thc IllsolvcncyRulcs.xld not in the
body ol tllc [InsolvellcylAel itsclf4'!]" (foolnolc olnittc(l).
C.LJ. The Pari Passu Myth 591
And for Finch, the "equality" principle "conduces to an orderly,

collective means of dealing with unsecured creditor claims and ...
involves lower distributional costs than alternative processes such as
'first come, first served'".57 For these commentators, the choice is
clearly between a free-for-all where weak creditors would inevitably
be beaten into last place by better-resourcedcompetitors, and
where the advantages associated with an orderly liquidation would
be lost, and the pari passu principle which alone stands as a
bulwark against this.
What is more, and even given its less than universal efficacy, the
pari passu principle, it is said, "retains some practical importance, if
only in a negative sense, in that it may have the effect of
invalidating pre-Iiquidation transactions by which a creditor hopes
to secure an advantage over his competitors".58 The principle is
widely seen to be "very much at the heart of the rationale for the
avoidance of pre-liquidation transactions".5* Oditah notes that "In
one sense, avoiding powers provide illustrations of insolvency law's
commitment to the principle of equality".60 And Goode observes
that "the principle of equity among creditors which underlies the
pari passu rule of insolvency law will in certain conditions require
the adjustment of concluded transactions which but for the
winding-up of the company would have remained binding on the
company".61
Given that the pari passu principle lies at the very heart of the
orderly liquidation regime, and given its role in justifying some of
the most distinctive and well-established aspects of insolvency law
(its preference and other avoidance provisions), any deviations from
it must naturally be considered odious at least prima facie.
"Equality" of treatment serves key practical and justificatory
purposes which bring social benefits; so differential priority, its
opposite, must result in a diminution of all those benefits. Those
defending the priority, say, of secured claims must therefore bear a
heavy burden of proof.
It is submitted that these arguments are based on a
misunderstanding of the nature of the liquidation regime. All these
Finch, "Pari passu", p. 194, noting a "traditionaljustification"for the principle.See also

Finchand Worthington,"Paripassu",pp. 2-3.
!
p. 144.
Insolvency,
Keay and Walton, "Preferentialdebts", p. 93, fn. 74, citing Keay, AvoidanceProvisionsin
InsolvencyLaw(Sydney,LBC InformationServices,1997),40-49.
' "Assets",
p. 465.
Insolvency.p. 344; see also pp. 345-348, where the link betweenthe avoidanceprovisionsof
the InsolvencyAct and insolvencylaw's "equality"principleis rcitcrated,pp. 387, 389-390
(preferences),and p. 423, which explains the rule against post-petitiondispositions by
invoking the principle.Goode does point out, however, that Ihc principlecannot explain
certainimportantnuancesof some of these provisions;scc especiallyp. 347; for a dramatic
modificationof the claimquoted in the text and the referencesabove, see p. 441.
arguments commit what will be referred to as the immunity/priority

fallacy. Once that fallacy is exposed and exploded, the rationales
given by those supporting the pari passu principle will be seen to
provide no justification for it. And that principle in turn is shown
not to play any role in bolstering the desirable properties of the
liquidation regime.
Let us start by understanding the distinction between priority
and immunity.62 Recall again the old image, that of the debtor
firm's estate forming a pool of assets. As the firm approaches the
stage where its assets are insufficient to meet its liabilities,63 and in
the absence of a special liquidation regime, the firm's creditors have
an incentive to rush to enforce their claims. The earlier they can get
a judgment and execute it, the more likely it is they would get paid
in full, or at all. The tardy creditor would find that nothing is left
for him, the pool already having been drained of all its contents.
Further, and on the eve of insolvency, creditors aware of the firm's
troubles and able to influence its decisions might try to steal the
first drink from the asset pool by getting the debtor to repay them.
Their gain is a collective
loss. The "first come, first served" system
encourages creditors to engage in duplicative (hence wasteful)
monitoring of their debtor in order not to be left behind in any
race to the pool. It adds uncertainty and therefore decreases the
utility of risk-averse creditors. And for the debtor whose assets are
more valuable if disposed of together as a going concern, the
individualistic system increases the possibility that those assets
would be broken up nonetheless and sold piecemeal to satisfy
claims as they arise.64 It is this value-destroying activity that the
dedicated liquidation regime must prevent. Notice the cause of all
the trouble: each creditor faces the necessity, and has the ability, to
act individually, in disregard of the interests of all others. Hence the
obvious solution: the dedicated liquidation regime is collective,
decisions being taken on behalf of all those interested in the asset
pool.
The analogy and the insight can be taken further. The
individualistic pre-insolvency debt-collection regime is a mad race
to the asset pool. Since that race is undesirable, the collective
insolvency system steps in to stop it. The creditors are now forced
See Mokal, "The Authcnlic Consent Model: Contractarianism,Creditors' Bargain, and

CorporatcLiquidation"[2001]LegalStudies400, 438: "(PJarties in the choice positionaccept
a distinctionthat will be referredlo as that betweenimmunityand priority"'.
For the ancestry
of this distinction,see DouglasBairdand ThomasJackson,Cases.Problems.and Materialson
SecurityInterestsin PersonalProperty(Mincola,NY, FoundationPress, 1987),67 (discussing
the "propertyright"and the "priorityright"of securedcreditors).
IA, s. 123.
Scc e.g. Thomas Jackson, "Bankruptcy,nonbankruptcyentitlements,and the creditors'
bargain"(1982)91 Yale L.J.857, and Mokal,"AuthcnticConsent".
to queue up to have access to the pool. Voidable preferences and

post-petition dispositions of assets etc. can now be seen as attempts
by some creditors to bypass this queue. In other words, they
represent efforts to gain immunity from the collective system.
Insolvency law deploys various mechanisms to deny them this
immunity.65 So long as there is no race to the pool, no one
succeeds in stealing a drink from it, and creditors await their turn
to have access to the debtor's resources, decisions can be made
systematically and in the common interest.
Crucially, though, note
that ensuring that creditors take their place in the queue is one
thing. The order in which they line up is, in general, quite another.
Each creditor's priority is their place in the queue relative to each
other creditor. But espousing the aim that creditors all line up does
not entail any particular order in which they should line up. It does
not commit the system to placing all creditors (as it were)
unidistant from the asset pool. The pari passu principle would put
each ("similar") creditor side by side rather than, say, one after the
other. But this arrangement is not a necessary concomitant to the
absence of the value-destroying race. So long as there is a queue
(with creditors standing side by side, one after the other, or in
whatever order), there is no race.
Consider now the various comments noted at the beginning of
this Section. It can be seen that they represent the immunity/
priority fallacy. This can be defined as attribution of the benefits
resulting from the absence of immunity from a collective insolvency
system, to an imaginary and irrelevant state of equal priority (the
realm of pari passu). If the pre-insolvency "first come, first served"
system is objectionable in a firm's insolvency, it is so because of the
monitoring, uncertainty, administrative, and loss of synergetic value
costs described above. All these costs result from an individualistic
regime, and all of them are avoided by a collective one. As long as
all those creditors whose actions would infiict those costs participate
in the collective regime or submit to collective decision-making,
how their claims are ranked relative to each other within the
collective scheme of distribution is (for these purposes) irrelevant.66
65 For
66 The example, IA, ss. 239 (preferences)and 127(post-petitiondispositions).
readerwould have noted the italicisedqualificationas significant.Withoutcntcringinto
the debate about its justifiabilityhere, it should bc pointedout that securedcreditors,for
example,acquireboth priorityand immunityin theirdcbtor'sinsolvency.Scc Re DavidLloyd
& Co. (1877) 6 Ch.D. 339, 344-345, per James L.J.: "[The insolvencyrules which dcprive
unsecuredcreditorsof the ability individuallyto proceedagainsttheirdebtor]were intended,
not for the purposeof harassing,or impeding,or injuringthirdpersons,but for the purpose
of preservingthe limitedassetsof the company... in the best way for distributionamongall
personswho haveclaims upon them ... But that has reallynothingto do with the case of the
man who for presentpurposesis to be consideredas entirelyoutside the company,who is
merelyseekingto enforcea claim, not againstthe company,but to his own property... Why
a mortgageeshouldbe preventedfromdoing that I cannotunderstand".
Similarly, if certain attempts to gain preference are undesirable,

that is because they undermine the benefits associated with
collective decision-making. Consider the following situation. In the
liquidation of a particular company, there is only one general
unsecured creditor (say a trade creditor without the benefit of an
effective ROT clause) and one preferential creditor (the Crown).
Suppose engineers a (voidable)
the former preference in his favour,
so that both
he and the preferential creditor finally get back the
same proportion of their debts.67 Now the situation here simply
cannot be objectionable on the basis that the pari passu rule has
been breached.In fact, the outcome would probably be perfectly in
accord with this rule, since the general creditor is likely to hold the
same sort of non-insolvency claim as the preferential one. So if the
rule applies, he should get back the same proportion of his debt as
the latter. However, the voidable preference provisions have been
violated nevertheless. So the pari passu principle does not underlie
these provisions, at least as they apply here. If this much is
accepted, then the argument can be pressed further. It would not
help to suggest that the principle justifies the preference avoidance
provisions as they apply to a trade creditor who has been paid a
greater proportion of his debt than another, say, but not when they
apply to a trade creditor and an employee who both get the same
proportion of what they are owed. To advocate this position would
again be to create something of a paradox: that the need to provide
"equal" treatment legitimates the avoidance of a preference in the
first situation, but actually providing such treatment consiituies the
objectionable preference in the latter!
In fact, to understand the basis of the preference avoidance
provisions, we must switch to the perspective suggested above. The
party given the voidable preference has been allowed to leave the
place assigned to him by the insolvency system. He has been
allowed to skip the queue for the insolvent's assets. This is the
factor which creates the preference.68 This example should make it
clear pari passu is not simply irrelevant to understanding the
preference (and several other) avoidance provisions. In fact, the
This contravenesthe rule that general unsecuredcreditorsare to be paid nothing until all
debts have been fully honoured;see IA, s. 175.
1 preferential
David Milman and Rebecca Parry "Challengingtransactionalintegrityon insolvency:An
evaluationof the new law" (1997)48 NorthernIrelandL.Q. 24, 25-26, perhapscome closest
to the view cxprcssedhere.See also Worsleyv. Demattos(1758) 1 Burr.467; 97 E.R. 407, 412,
per LordMansfield,who seemsto regardas distincttwo typesof violationof bankruptcylaw
which result from a voidable prefcrencc.The creditor accordcd such a prcferenccgains
immunityfrom ihc managementdecisionstaken in the collectiveinterestsof all creditorsby
the trustee,and in addition,escapeshaving to participatein the rateabledistributionof the
estate.
C.L.J. The Pari Passu M)tll 595
focus on the "equality" principle can be positively misleadingin

this regard.69
4. THEPARIPASSU
PRINCIPLE
INACTION?
It is to be noted that the argumenthere is not one fOIcl chsingein
the law, for example to abolish the plri p(l.S'.S'I( rule. The point is
rlther that the alleged manifestationsof the principlesIrenothing
of the sort. The law vis it stels7cls loclsay is better understood by
adopting the analysis in the previous Section. Thcitthe veneration
of the pcori pS.SW principleis false becomescleKlrwhen one excimines
the case-law said to support it. lt must be emphasisedthsitthe only
purpose of discussing these decisions is to show tilXltrelisiliceon
them in support of the pari pSSl principleis misguided.It should
be noted also that the order in which these cases (wrediscussedis
thematic,not historical.
Goode seems to cite Ex- parte Mcrsky7"(IS Cluthorityfor the
proposition that "The paBi pASSll rule may not be excluded by
contract".7'In this case, A and B enteredinto cincigreemelitfor A to
sell a patent to B. B promisedin returnto pay over to A lhe royalties
received,and, in addition,lent A £12,500. It wciscilSO agreedthcitsfor
s}tisfaction of this debt, B would have <1lien over one-hsilfof the
royalties received, except if A became bsinkrupt,in which ccise B
might retain all the royalties. A became bsinkrupt.It WsIS held on
appeal that the provisionallowingfor B to hsiveclrlitiolwal securityin
the event of A's bankruptcy was void as being (l frsludon lhe
bankruptcylaws.72Goode quotes the followingpsirtsof thejudgment
in supportof the inexcludibilityof the pri ptl.5'.Slrrule:
... a man is not allowed, by stipulation with >wcreditor, to
provide for a differentdistributionof his eSects in the event of
bankruptcyfeoin thswt}82/JiC/t
tl1el01tPrC)}}iLlCJv*73
69 For lhc policy of seclion 127" of IA, which providesfor lhe ;voidalllccof posl-pc(iliott
dispositionsof assets,sec LighlmanJ. in CoZat.& Cv. v. StesA-12()()0] I W.l,.R.906. '3()9(;Illd
.lpprovedby the Court of Appeallin Hollicorlrt (C;}S0JATC.V) Lt{. v. Bfw1k.*J IresIort(l[20011
Ch. SS5, 563):the provisionis "partof the st,llutoryschemcdcsignedlO plCVCllt thc direclors
Of a company,when liquidationis imminent,from disposingof thc colnp.ltly'solssctslo lhc
prejudiccof its credilorsand to prcscrvclhose assets for thc bcnefilot lhc gencr.l body cr
creditors'.Ag.lin, thc focus is clearlyon thc prcscrv;ltion of lhc insolvelll'scsl.llc wilh a vicz
to its cvenlualdistribulionunderthc st;ltutoryschemcof distribulion;llccdlessto s;ly,whclhcr
that distributionshould be 'cqllul' or otherwiscsimpJyis not implic.ltcal il) thc policy of lhis
section.
7() (1873) 8 Ch. App. 643.
71 Jt.So/l'f'StC), p. 144. Goodes position iS not utl.mbiguous,sincc his .lrgtlmenlon {his poinl is
ralherbricf,;Indis he.lvilyqu.llificdl.ltcron in lhe texl. Sce .llso Odil;h, "Assets', p. 464 ;nd
lhe text accomp.lnyingrn. 37, who uscs er p. MTlCA({}S to simil.lrcflcct.
72 Sce 8 Ch. App. 643. 648, per MellishL.J.
7t J;lmes L.J. sit p. 647 (cmph|sis added) (lhC samc jtidgc whosc dictulll colccrililg securcd
creditorswas reproducedabovc).
... a person cannot make it a part of his contract that, in the

event of his bankruptcy, he is then to get some additional
advantage which prevents the property being distributed under
the bankruptcy laws.14
But neither of these (nor any other portion of the judgments)

dicta
make any reference to
the pari passu principle. What they do
indicate is, simply, that the bankrupt's property is not to be
distributed except under the rules of the bankruptcy system.
Crucially, a creditor cannot, even ex ante, "get some additional
advantage" in any way not itself allowed by that system. To resort
to the analogy introduced above, he may not skip his assigned
place in the queue, whatever that place might be. The decision
provides absolutely no support for the very different proposition
that under the liquidation system, the places assigned to creditors
are all unidistant from the asset pool.75 Quite the reverse is in fact
true. We must remember that pari passu was almost as rare in
practice at the time of this judgment as it is now. The decision
must be seen against the background of a system which (for
example) gave extensive preferences to the Crown, including those
provided by s. 32 of the Bankruptcy Act 1869. The Crown also had
statutory liens over various types of property by virtue of the
different Excise Acts. And the Bankruptcy Act 1869, s. 32, had
enhanced the pre-existing preference for certain debts owed to the
bankrupt's servants and clerks.76 In addition, the Bankruptcy Act
1969, s. 39, provided for mandatory set-off in bankruptcy in the
appropriate circumstances.77
It should be clear distribution according to the bankruptcy laws
was not distribution pari passu. The bankruptcy laws did not place
all creditors side by side. The "equality" principle was part of that
74 Mellish
LJ., at p. 648 (emphasisadded).
75That is the
propositionit would haveto endorscif it were supportingthe "equality"principle.
Scc also the only authority referredto in the judgment, Higinbothamv. Holme (1812) 19
Vcs.Jun.88; 34 E.R. 451, which was directlyapplied by Mellish L.J. (at 647-648). Here, a
marriagesettlementprovidedthat in case the husband,having previouslybeen cducatedfor
orders,should enter into trade and become bankrupt,his life interestwould determine.The
husbandlaterenteredinto tradeas a cotton manufacturer,and eventuallybecamebankrupt.
Lord Eldon L.C. struckdown the relevantclauses of the marriagesettlementas a fraud on
the bankruptlaws (p. 453). Therecan be no doubt that "equality"of distributionsimplywas
nol at issue. The only objectionwas clearly lo the attempt to evadc the disposal of the
bankrupt'spropertyby way of collectiveproceedingsfor his creditors'benefit(pp. 452-453).
Thanksto John Annour for emphasisingto the authorthe relevanceof this decision.
76See and Walion'ssummaryof the historyof "Preferential
77Scc Keay debts",pp. 86-91.
Ex p. Bamett, In re Deveze(1874) 9 Ch.App. 293, 295-296, per Lord Sclborne L.C.
the otherjudges in this case, both of whom concurredin the Lord Chancellor's
Intcrestingly,
decision,were Mellishand JamesL.JJ.,the judgeswho decidedEx p. Mackay.Beingawareof
this deviationfrom pari passu providedby the BankruptcyAct 1869 (as undoubtcdlyof the
othersalreadymentioned),they could not possiblybe taken to be layingdown or upholding
some overridingor generalrule in favourof "equal"distributionin Ex p. Mackay(especially
since any such rule gcts not a single menlion in eitherjudgment).On insolvencyset-off, scc
the discussionin the text, below.
C.L.J. ThePari Passu Myt11
597
regime, but it was by no means the only part (it might not even
have been the most importantone). ln addition, of collrse, on the
facts of this case, the priorityprovidedto B by way of the lien over
one-half of the royaltieswas upheldas perfectlyproper by the sClme
judgment.78So, to cite Mackoyas an authoritysupporting
ex parte
only equal distribution is, with respect, quite wrong, since it is at

least as much an authority for the inexcludibilityof ltequsll
prioR
treatmentof claims, also provided for by the same l<ws. The only
proposition this decision can be said to support is thctt one may
not bargain for immunity from the collective bankruptcy regime
(except as providedby the law).79
The sceptical reader should turn to Ncttioe1blWest/wlil1ster Bonk

Ltc/. v. Halesoten Presszvorkand Assemblies Ltf/.8<) The House of
Lords held (by a majorityof three to one) th>t since the regime for
the administrationof insolvent estates embodies importclntelenlents
of public policy, and since the rights of insolvencyset-oF form part
of that regime,the creditorgiven such set-off rightscannot contrslct
out of them. This despite the fact thtlt the agreelllent which
precludedinsolvencyset-off, and which was struck down by their
Lordships,seemedspecificallyto have been concluded to (it1ter oSia)
ensure that ;'certain large payments which were dtle to the [now-
insolvent] company should be available for distribution pro rclta
amongst its creditors".8'The llquidator'sview that the party now
asserting set-off should be "in no better position thLlnclny other
creditor" in the debtor company's insolvency-WslS noted,82 but
rejected.
So an exception to the "equality" principle the contractual
disapplication of which might have led to a more "equal"
distribution-is as mandatoryas any other pclrtof the liquidation
regime.What cannot be contractedout of (in cln unclcceptableWcly)
is not the pari principle,but the whole collective systetn for
passu
the winding-upof insolvent estates. Not only is it forbiddenfor a

creditorto leave his assigned place in the queue and step slheadof
others, he cannot even leave his place ahead of others clndstand in
line with them. The inequality inherentin the system (in this case
78 SCe e.g. James L.J., at p. 647.
79 An idcntical an;lysis applies to E.r p. Willitln1s(1877) 7 Ch.D. 138 al1d E.\ 17. J(lsk.suzt(1880)
l4 Ch.D. 725. n both cases, the mortg;lgee's right lO distr,lill on lhc ch;ttcis upon thc
mortgaged property W;15a clear attempt to gr.lnl him imt11unily froll] the collectivc
bankrupicy procecdings to which lhc mortg;gors werc subject, tc) thc cxlel1t o thc v;lluc of
the chattels distrained upon. See also thc simil;lr casc of Re Jo/ltt.s119281Ch. 737. All thrce
c.lses .re used by Odit;lh, "Assets", p. 464, fn. 37, as demonstr;llilig lhc opcr;ltioll of thc pciri
p{1551#principle. For rcasons discussed in the text to which this nolc is .|tl;lchc(l, it is
submitted
that they dc.ll with an entirely different point, with immunity, nc)l priorily.
80 [19721 A.C. 785 (HL).
8I See the submission on behs1lfOf the company. tbid.,p. 792A.
82 Expressly so by at least one of their Lordships; see pewr Viscount Dilhorne, p. XOIE.
598 The Ctln1briclgeLSJ}tZ
Jozo?cll [200l1
by way Ofinsolvencyset-off)is everybit as bindingas the equality.

Note againthat the focusis on clttemptsto frustrate(someof) the
rules of the liquidcltionregime.Whetherthat would lead to cln
increaseor decreKlse in the "equality"of distributzon is simply
il'l'eleVclNt X3
Let us considerBritishlteelwatio11zz1 Air Lines Llul.v. Colw1plgstie
Ncllsol1t11eAir Fr(lelce.84 BritishEagle (BE) W1S a memberof
cleslringhouseschemeoperatedby the lnternational Alr Trclnsport
Association(IATA).Sumsdue from participating airlinesto each
otherwerenettedoSclt the end of everymonth.Thosewith cl net
credit bcllslncewould then receive(w paymentfrom the clearing
house, whilethose with (l net debit bcllancewere requiredto pfly
illtO the system.BE hKlving goneinto liquidation,it wctsfoundthclt
it owed money to severcllKlit lines, but hsld a claim clgainstAir
Frlnce (AF). A bclremajorityOf their Lordshipsclllowedthe
liquidatorto recover tht sum on the basis that the netting
rr.lngementscontravenedthe pali pas.szfprinciple.The Lords
rejectedAF's contentionthatthe liquidator's onlyclaimlay clgainst
the clearinghouse,clndthsltit could only be for the amount(if
ny) whicllremainedto BE'screditclfterthe netting-olT. According
to the msljority, the nettingarrClngements capturedfor the benefit
of the membersof t}le clesringhouse an clsset(the claimagainst
AS) which,but for thoseclrrangements, wouldhlve beenavslilable
for distribution amongBE'sgeneralcreditors.
That this clse hClsbeendescribedas "[undoubtedly the]leading
modern(uthorityon the pre-eminence of thepclri pa,sszJ principle"85
is not witlloutirony The clse could not provideany supportfor
the /vct} i ptf.s.szprinciple.Recslllthclt this principlesupposedly
reqzlires "ecJol.s"to be trecltedequcllly.86 And the determination of
''eqtlcllity''
is generslllyleft to non-insolvency lclw:
The Act of Prlrlislment unquestionably says thclteverybody
shall be pclidpl)i pPl.9Sl{, but thsltmeanseverybodyafter the
windingup has commenced.It does not meclnthcltthe Court
sllulllook into pslSt transactions, (lndequCllise all the creditors
... It takes them exactly (ls it finds them.87
/w1re}Dste e (1874)9 Ch.App. 293.

83 1 simil,lr cfEct, scc e.ig. l. p. B{IIJZL'II,
84 [1975] 1 W.L.R. 75X (HL). For crilicism of thc decision, sec the Cork Rcport, p;lr.s. 1341-
1342.
Xs Odil.lh, "^SSClS", p. 465; il milst bc ciliph.lsiscd th;lt Odit;h himsclf is unilnprcssed by lhc
dce:ision .Iaidsubjccis it to cogent crilicism; sce p. 46fi.
#6 Tl)C rulc lh.ll a11tilosc whl corrcctly .lnswcr .x number of qlicslions in an cx.lm .lrc to get .x
Ill;liks, cnshrincs olic typc of cqu.llily. Thc rtilc lht ;1ll thosc whn lolkc thc cx.lin .Irc to get x
m;lrks rcprcscnts quitc ;Inother. Thc p(l-i pr.s.s principic is Ir;ldilion;lily conccived ;ls
;In.lloigotle;10 thc former r;lihcr thsin lhc lslt(cr rulc.
87 /t( SE7Rilll, K1iglt & C(s., ('.\' p. A.v/w/9tIlls(|86X) L.R 5 E4. 223, 226 pesrLtl-d Rolililly M.R.
Scc .lso Odil.lh, "Assots'', pp. 463 .Ind 468.
But even Lord

Cross, speaking for the majority, accepted that AF,
and other members of the clearing house, were never equal to BE's
general creditors outside liquidation.88 During BE's solvency, the
members of 1ATA could not (unlike BE's non-IATA creditors) just
have ignored the clearing house arrangements and sued BE for any
sums owed. Correspondingly, BE could not, while solvent, have
proceeded directly against AF. It could only have claimed against
the clearing house for any net balance due to it.89 And yet BE's
liquidator was
allowed to do precisely what BE would not have
been able to do. By the same stroke, BE's 1ATA creditors were
forced to claim directly against BE (by proving in its liquidation)
while they would have been neither required nor even allowed to
do so before the commencement of its winding-up. Pre-insolvency
unequals were forcibly "equalised" in insolvency. This hardly
constitutes a vindication of the pari passu principle, no matter what
the judicial rhetoric. And in any case, the sums recovered as a
result of this decision would not have been distributed pari passu.
Pre-preferential and preferential creditors etc. would have taken the
first bite.90
Perhaps a better way of understanding the disputed issues in
British Eagle would be to look at the netting arrangements simply
as an attempt on part of IATA to prevent its members from having
to submit to the collective liquidation regime. Or at least this is
how they seem to have
been viewed by the majority of their
Lordships.91 That such
contracting-out (i.e. immunity) was not
objectionable per se was also accepted. Lord Cross implied that,
had the IATA arrangements created charges in favour of the IATA
creditors with effects equivalent to the disputed netting scheme,
those would have been effective against the liquidator if duly
88
[1975] 1 W.L.R. 758, 777C-H; to the same effect, see Lord Morris(disscnting).pp. 764F,
765A and 765E;and LordSimon (disscnting),p. 771F-H.
89 Ibid.. 777C-D
90 This p. (per LordCross).
point is impliedly noted ibid., at pp. 761B (Lord Morris) and 778H (Lord Cross).
Ncedless to say, had there been a floatingcharge over the relevantassets, its holderwould
have been rcpaidin preferenceto generalunsecuredcreditors.The same point againseemsto
have been missed by the Court of Appeal in In re Celtic ExtractionLtd. (in liq.) [2001]
Ch. 475, 491, where Morrit LJ. (deliveringthe Court'sjudgment),invoked,inter alia, "the
very considerable... public policy requirementthat the propertyof insolvcntsshould bc
dividedequallyamongsttheir unsecuredcreditors",to upholdthe ofheialreceiver'sabilityto
disclaima waste disposal licence as oncrous property.The Court'sasscrtion,that any assets
preservedby the disclaimcrwould bc distributedpari passu amongstgeneralcreditors,is of
course without foundation.Any such assets (on the facts, therewere nonc) would mostlygo
to any floatingchargeholderand to prc-prefcrential and preferential
creditors.
91 Ibid..
p. 780G-H: "[WhatAir France]are saying here is that the parties lo the 'clearing
house' arrangementsby agreeingthat simplecontractdutiesare to bc satisfiedin a particular
way have succccdcdin 'contractingout' of the provisionscontainedin section 302 for the
paymentof unsecureddebts 'pari passu'." Note the unnccessary(and inaccuratc)emphasison
"equality"at the end of this quotation:what would have been contractedout of was the
whole collective regime, its incquality (e.g. in favour of prc-prefcrentialand preferential
creditors)as well as its "equality".
registered.92 So the objection was not to the granting of immunity

to only some of BE's creditors (or indeed to granting them priority
over others). Rather, the majority were of the view that the
advantages associated with recognising this novel way of acquiring
immunity were not sufficient to outweigh (what they saw as) the
costs of such a significant derogation from the collective regime.93
This conceptualisation of the majority's decision then also allows
one to make sense of the strong dissenting speech by Lord Morris,
who emphasised the benefits which flowed from having the netting
arrangements.94 On the arguments made here, the thrust of the
dissenting speeches would of course have to be that these benefits
(of allowing the arrangements to prevail) would outweigh any
associated costs.
Unfortunately, though, there seems to have been no suggestion
in the arguments that the issue should be regarded thus, as a
question of balancing the commercial advantages of recognising this
novel way of gaining immunity from the liquidation regime against
any lessening of the advantages associated with having a collective
system. As already mentioned, the latter include the ability to
preserve the going concern surplus if there is one, and the
minimisation of uncertainty, monitoring and administrative costs.
The IATA netting system should have been upheld if the costs to
the actors resulting from any increases in uncertainty, monitoring
and administrative costs, in the risk that a going concern surplus
would be lost, and in the diminution of the pool of assets entailed
by the existence of immunity for IATA creditors, were outweighed
by the benefits it brought to the same actors.95 (Note that this is a
92 Ibid.,
p. 780C. The existenceof such charges would of course accord priorityover BE's
generalcreditorsto IATAcreditors,as well as grantingthe latterimmunityfrom the collective
93 liquidationregime.
Ibid.,pp. 780H-781A:"[It] is to my mind irrelevantthat the partieslo the 'clearinghouse'
arrangements had good businessreasonsfor enteringinto them and did not directtheir minds
to the questionhow the arrangementsmight bc affectcdby the insolvencyof one or more of
the parlies.Such a 'contractingout' must ... bc contraryto publicpolicy.The questionis, in
essence,whetherwhat was called ... the 'mini liquidation'flowing from the clearinghouse
arrangementsis to yield to or prevailover the generalliquidation.I cannot doubt that on
principle the rules of the general liquidation should prevail". Despite appcaranccs,the
objection to grantingimmunityfrom the collective regime was not an absolute one. As
alreadynoted, the judge had impliedearlierin the same paragraphthat he would have been
content to allow immunityfor the IATAcreditorsby way of security.This also shows the
objectionwas not one of principle.Therewas no principleinvolvedwhichlaid down, say, that
no one can bargainfor immunity.The matterwas ratherof policy.One could only bargain
for immunityin an acceptableway (the authorityfor this is BritishEagle itself), and for the
right reasons.Even if the method of attainingimmunitywas acceptable,the reasons might
not. In Ex /;. Mackay.the only discerniblereasonfor the extra securitywas the desircof the
creditorto betterhis own position in his debtor'sinsolvency.Othercreditorssufferedharm
withoutreceivingany compensatingbenefit.
94 See
95Thate.g. [1975]1 W.L.R.758, 761F-G, 762D-763C.
was almostcertainlythe case; it follows that the IATAschemeshould have been upheld.
Parliamentseems to have taken a somewhatsimilarview; see CompaniesAct 1989, Part VII,
which reverscdthe effectsof the decisionwith respectlo financialmarkcts.The Act creates
C.LJ. The Pari Passu Myth 601
sufficient but not necessary condition, since the initial distribution

scheme provided by the liquidation regime is not self-evidently
appropriate and therefore must itself be argued for.) The pari passu
red herring served massively to confuse this issue. In failing to
consider it clearly, it is submitted the British Eagle decision is
deeply unsatisfactory.96 Be that as it may, for the reasons discussed,
the leading modern authority on the pre-eminence of the pari passu
principle actually stands more for its hollowness than its
hallowedness.
Ex parte Barter; Ex parte Black91 is another interesting decision
cited in support of the pari passu principle.98 X, a Portuguese
steamship company, entered into an agreement with Y, who were
shipbuilders. Under the agreement, Y were to build and sell to X a
steamship, the price for which was to be paid in instalments as the
construction work progressed. On payment of the first instalment,
the agreement provided that the
steamship, its engines, and all
associated materials were to be vested in X, the buyers (the Court
of Appeal referred to this as the "vesting clause"). It was also
agreed that X would have the right to seize all these materials if
the construction work remained discontinued for a specified period,
or if the ship was not delivered on time, or if Y became insolvent
or bankrupt (the "seizure clause"). Finally, the agreement stipulated
that, if any of the events mentioned above should occur, X would
have the right to employ alternative builders to complete the ship,
and to use Y's shipyard, premises, machinery, plant, tools and any
other materials present on Y's premises suitable to the purpose (the
"user clause"). The work commenced and the first instalment was
paid. Subsequently, on Y's insolvency, X exercised its rights under
the "seizure clause" and took possession of the ship, engines and
related materials. This was upheld by the Court of Appeal: X was
merely seizing property which already belonged to it by virtue of
the "vesting clause".99 However, the "user clause" was struck
yet anotherexception(if the BritishEagle decisionwere to be taken at face value) to the

"equality"principle.The recent decision of NeubergerJ. in Money MarketsInternational
StockbrokersLtd. v. London Stock Exchangeand Another (Transcript,10 July 2001),
recognisesyet anotherexceptionto the principle,this time concerningpropertythe ownership
of which depends on the personal characteristicsof the owner, and further, assets so
incxtricablyIinkedto such propertythat they could bc considered"ancillary"lo it (see e.g.
paras. 110-113).In this case, these were, respectivcly,the membershipof the London Stock
Exchange,and a *"B'share"entitlingthe holder(roughly)to vote on decisionsabout how the
companywhichowned the Exchangewas to bc run, and to participatein the dislribuiionof
the valuereleasedbecauseof that company'sdcmutualisation.
96 Scc Goode's
misgivingsabout the decision, Insolvency,pp. 181-182, and those of Oditah,
"Assets",p. 466. For an uncriticalinvocationof the decision in favour of the "equality"
see Finch,"Paripassu",pp. 198,fn. 28 and 199-200.
97 principle.
26 Ch.D. 510.
(1884)
98 See Oditah,"Assets", fn. 36.
99 26 Ch.D 510, 518-519p. 464,
(per Fry LJ., dcliveringthe Court'sjudgment).
602 TJteCt}71hrilgeLXv Journal [20Q}]
down, since "a power upon bankruptcyto control the user after
bankruptcyof property vested in the bankruptat the date of the
bankruptcyis invalid'.'°°
The Court's decision is hardly surprising, in view of the
extravaganceof the terms of the "user clause if for no other
reasoll. But in Llnycase the relevant issues are very cleClron the
facts. We must note the two most importantpoints. First and yet
clgain, there wcls no absolute bar to the parties bargaining for
immunity from the collective regime. This was quite obviously the
eSect of the i'vesting' and i'seizure clauses Instead of lining up
with the rest of YXs creditors and submitting to the collective
decisions made by Yss trusteesX was able to remove itself from
the queue to the extent of the value of the materialscovered by
the two clauses. But secondSthe "user clause" was cln attempt to
commandeer Y's remaining estate for the sole benefit of XX
removingthat too from the ambit of the trustee'sdecislon-maliing.
This was regardedas unjustificlble.Even as to the "user clause"
X hd argued that it would redound to the generalgood of all of
Y's creditors since the completion of the ship would reduce pro
fST1tf) the amount for which X would prove in the bankruptcyfor
Y*s breach of contract.}0}The Court of Appeal disclgreed:in the
slbsenceof the clausel the trustee would have decided whether to
complete the ship clnd claim the contractualpriceSor to abandon
the contractSand this decision would have been made for the
benefit of all of Y's credstors.But the "user clause" removed the
trustees ability to luake thclt choicef cind instead vested that
choice in X. 102 To the extent to which X was a creditor for
damslgesfor Y's breclchof contract the clause purportedto grant
X immunity from having to participate in the collective
bankruptcyregime. Tl1isattempt to gain immunity was regarded
wsunacceptahle.
Now whateverone might think of the distinctionsmade in the
Courts judgment about acceptable and unacceptableways of by-
pslssingthe collective regime we should note once again that the
pcJri pWSsu principlewas not at issue. The ';userclause8'would have
by-psissed the inequcility of the regime (inherent in the rules
governing set-olTXpre-preferentialand preferential claims etc.)
h£9%ore it evsldedits i'equality'. The crucial issue was not X's place
in the queue relative to other creditorsbut the fact that he would
not have had to queue up at all, and-if that was not ellough-
"X)Zbit/..p. sl94
p.
ZbinJ.,
8>1bill.
lle 520.
C.L.J. TllePari Passu Mytl1 603
would have prevented the trustee being.lble to makel collective

decisionabout much of the remainingpool of lssets."'3
The sslme point can be made agslin (Ind again. C<lsescited in
support of the "equality" principle either support thCllprinciple
only as part of a significantly "unequal" illsolvency regime, or
more frequently,show nothing except the lawzsintolernce towards
attemptsto gain immunityfrom the collective liquidsltionsystem in
unacceptableor unfamiliarways. In view of |11 this, the pari p(z.s.s
principlecould not possibly be necessclryfor there to be (wnorderly
liguidation. In addition to all the arguments(Ibove, to the extent
that the current liquidation regime is clccepted (lS fulfilling the
requirementsof orderliness and as replacing the vsllue-destroying
rush for an insolvent's assets, clnd given that pCfl'i pz.S.Stf iS a very
partial feature of the system, the present liquidation regime itself
constitutesa rebuttalof any such clclim.'4 Wllcltis more, the very
significantdeparturefrom this principle re,oresentedby insolvency
set-oF has been regarded at the highest judicial level 'dS itself
necessaryfor a "proper and orderly"adminislrationof the estates
of insolvent companies.'°S But then, since "equal" tresltmentof
difTerenttypes of claim is not required to gain the practicll
advantages associated with the orderly winding up of insolvent
estates, and since it is not necessary to justify insolvency law's
peculiar features (e.g. its collectivity, and the (lvoidance of
preferences and post-petition dispositions), the existence of
diSerentialpriority includingthat of securedcreditors- cannot be
impugned on the ground that it interfereswith the (ltt<inmentOf
these goals.
Finally and in the interests of compieteness,a decision which
clllowsparties to bargain for a priority diCerentfrolll the one they
would have had without that agreement btlt willlotlt allowing
1'))E.xp. J(J!'(1880) 14 Ch.D. 19 is a similarcolse,and is cited by Goodc, PrEt(iples, p. 151,fit.
39 and Oditah,"Asscis",p. 464. fn. 36, as .ln ;lpplicalionOf lilc "cqtl;llily"principic.Hcrc,
X attemptedto VCSt thc titleslO portionsof Y's csl.lle (and nol Inercly thc llSC, AS Sn .\ p.
B(Jrter) in herscif on Y's b.nkruptcy. This W;\¢t struck dowil, XOUl lhc rc;lson w)s toss
discussed)the un.cccpttibleslltEmpt lO circumvenlthc oper;ltinnOf tilc colleclivc regililc.
With rcspecl, thc pari I)a.v.vtJrule simply w.ls not relevantlo (he decisioll OltC \t.\)' or lhc
other.
04 It would bc olhcrwiseif thc cl.im were tholl(hc liquid;ltionsye;lcma(RtII(I awotbc "or(lerly' in
the appropriatesense to the cxtent lh.lt il distergesfrom <In''CtJll;lls distribution.13Ulsucil ol
cl;lim would be trivi.ll,and would amount lO S;lying lh.lt, tO the cxlenl th.lt lhc system
divcrgesfrom the p(Jripv.v.srl prilicipic,il divergesfrom lhc ptiripf.Ss principic!Nonc of thc
comment.ltorscited abovc in supportof thc principicSCClil to bc l.lkinL;Ilial position,iind .111
of them scem tO *lCCCpl lhsit thc current liquid;llionregimc (despilc ils Icss-til.lil-pertccl
adhcrencclO lhc l)X7ri of order le lile processolg
pUt.<SlJidc.ll) .lt le.lst provides,I f.lir dezgrec
windingup insolventestates.
105N(llional Wesstolin.vterBtwk Ltuf.v. Sf/e.solltewxPresswlork Ltif. [1972] A.C. 785t 809A, p*r
Lord Simon; to similareffecl bul cxpressedwilh gre.licrrcscrv.zlion,sec lilc viewaf Lord
Kilbrtindon,pp. 822C .nd 824A. For lhe propositionth.ll insolYcncysot ofr cxisis, not lo
further any such gener.ll purpose, but only for the benefil of thc p;lrly l).lving mulut
dcsllingswith thc bankrupt,sec the solc disscnlingspeccilof LorclCross,ihi(/.,pp. X12-813.
604 ThcX Cals??bri(lge Lalz} Jour1lal [200 1]
immunityfrom the rules of the liquidationregime is Re Mrzx^lle11

This case concerned an agreement
CoE11lWlI{f1iCatiOl1$ COI'pO)'CltiOZ1.l06
wherebycertainbonds issued by M Ltd. (held by partiesreferredto
hereslStercls;'the Bondholders")were guaranteedby M plc. ;'on cl
subordinatedbLIsis".Subsequently,M Ltd. being insolvent, M plc.
WsIS pl£lcedin (wdministrcltion. The administratorapplied for sIn
order to exclude tlle Bondholdersfrom pclrticipcltion in a scheme of
clrrKlngemellt under which, securedand preferentialcreditorshaving
beell paid, the remainderwould be distributedpvlrlpC.S.S'I( among
M plc.'s other unsecured creditors. In accordance with the
subordincltionagreement, the Bondholders would only be paid if
these other unsectlredcreditors were first paid off in full. It was
cleslr on the fclots thLIt, if this scheme was approved, the
Bondholderswould get nothing.lX'7
It WclS argued on behalf of the Bondholders that the
stlbordincltionagreementwas void as being in breslchof the peri
pCl.v.S'llprinciple:"tlle liquidatorougllt not to be requiredor entitled
to look behind (t proof to determinewhethera creditorsubmitting
.1 proof WslS entitled to payment pari passu with other unsecured
Cl'editOrSs'. 108 In eSect the submission was thslt the pciri pa.s.su
principleshould be given effect with respect to all those genersll
creditorswho submitted a proof, the liquidator being required to
tUI* a blind eye to the pre-insolvencydeCllings between the debtor
rInd(some of) its creditors.This was rejected.Vinelott J. pointed
out that "[t]hereare sttusltionsunder the lnsolvency Act 1986 in
which an tInsecureddebt is postponed to other unsecuIeddebts'.§09
In these situatiolls,the liguidatormight well need to have regardto
the pre-insolvencystatus of diSerent unsecuredcreditors.So if the
liqtlidator had no difficulty in determining the pre-insolvency
positions of VciliOUS unsecured creditors and giving eSect to
stcttutorysubordi2lcltion, he vfould flce no greaterhurdlein dealing
with contrClctual subordincltion.'l''The judge reKldBriti.J1Eagle KIS
lslyingdown the rule thClt"a creditor cannot vatidly contract with
his debtor that he will enjoy some advslntagein (w bankruptcyor
winding-lp which ss denied to other creditors". However, he held
tlasltthis did not preclude(wnagreementbetween A and B Ltd. for
the latter'sdebt to A to be subordinatedin B's insolvency to thLIt
owed to B's other unsecuredcreditors.ll 0
t°" 11993) I W.L.R. 1402.
7 At p. 1404G.
At p. 1412C.
1'19IhiS, mcnliol)inzX;Is ex.lmpics 1A, ss. 74(1)(f) (slFms payable to a member of the insolvency
COtilpsilly) sInd 2l5(4) (SUIllS owed to a dircctorwho htlS becn held liable for fraudulentor
wrongfultr;lding).
| ° I/);J.,[). 1412E-
tbid.
C.L.J. ThePars Passu Mytlt 605
This decisionshouldmakeit clearthat the pari pcz.ssl(principle

is far fromsacrosanct.lt is obviousthatRe MfJwllZcXllclllows parties
to avoid it. The Bondholders, who would hclverclnked pvleiptl.v.SIt
with M plc.'s othercreditors,were relegatedbecause of the terms

of theiragreement with M plc. to a positioninferiorto those other
creditors.But this aspect of the decisionshould not tempt one to
the hasty conclusion that the confirmed
inexcludibility by Britisl1
EcJgle"applie[s]only to those rules the infringement of which
wouldgive one creditoran advantage denied to other creditors''.'l2
Resortingonce again to the analogyof the commonpool, this
wouldamountto sayingthat,the ruleis thclt,withinthe insolvency
regime,one can contractout of one'sassignedplacein the queutif
the resultwouldbe to benefitthe remainingunsecuredcreditorsin
the debtor'sinsolvency,}l3but not if it wouldmClke thett worseoS.
But this interpretationwouldbe quiteinconsistentwitll the House
of Lords'judgmentin Ntzzltestv. HcilesolzZez1.§l4 That cslseshows
one is not allowedto changeone's placein the queuefor the pool
of the insolvent's assets simply because that would incre.lse the
bankruptcyvalue to be distributedto the remslining creditors.As
alreadynoted, the Lords there struckdown an clgreemelltwhich,by
alteringa creditor'spriority position,would have brought (Ibout
just suchan increase.lS
So svhenshould parties be allowedto cll£lngetheir priority
positionwithinthe collectiveliquidationregimezin otherwords,to
altertheirrelativeplacesin the queueto the pool Ofthe insolvent's
assets?Only a hint can be providedhere. Most obviously,an
agreementto alter the prioritypositionof creditorswitllin the
liquidationregimeshould be allowedwhen-for all the creditors
whoseprioritypositionin theirdebtor'sinsolvencywouldbe mClde
worse off becauseof the agreement-theexpectedbenefitsof the
agreementto those same creditorsoutweighits expectedcosts."6
' Goode, SJI.sollew(!,p. 146 does reach th,lt conciusion.iSe refcrs lo (Jfil'E'.St V. Nal}.sotlten
r.ltherthslnBritw.s/1Eagle*,but for lhc rcasondiscussedin lhc luxl immcdi.ttelybelow,lhis is
aImostcert.linlyan oversight.
1|3 That the Re Maxwell dccisionholsthis cScol is notedby Goode, IZ.vollPcll(
st,p. I46, fn. 19.
|14 Sce thc discussionof lhis casc .wbovc.
§|5 The creditor,NationalWcstminstcrBank,would hslvcbecn dcprivedby lhc ;sgreclllent of i(s
ability to combinctwo .Iccoulltsof lhe insolvent,and to sct oS the insolstcIlt s li,lbililyto il
on the overdrawnaccount .sg.linstthe credit bal.sncein the olher. Ncccilcss to sy, lhc
judiciell dis.lpproval of lhe agreementresullcd in thc B.lnk's h,lvillg priorily ovcr thc
insolvent'sothercredilorsto the extentof the ;Imountset oW
116 For a illuslr.ltion,see Re} Pft. [1993]I W.L.R.l402 ilsclf, .t 1z.141fiF-H.It wouid
Mtt.xxltc/Z
often be the case that rl lroubledcompanyc.ln only motlnl .l rcscue,|ttempl iS some ef its
cxisting creditors(EC) creatc .In incenlivcfor outside fin.lncicrs(new crc(lilorsor hIC) to
IcndtO the company,by agrecingto subordinaletheir(EC's)cl;lims lO lhosc of NC, should
thc debtor comp.lnybc liquid;ltedThe loss in insolvonc.yv;lluc lo EC rcsuStingfrom lhe
subordinalionagrcementis outweighedby thc bencfil to thenl of the incrcasedpossibilily
that lhc companywould be able lO avoid liquidation.zllogetherwith Ihe 11elpof thc funds
iniectedinto it by NC. See .IIsioRe Porthttse CloJlJi)tgLt/. [1993] Ch. 388. I or the reasons
606 TlzeCambrilgeLzv Journcwl [2001]
This agasn is sufficxentbut not necessarycondition,and is a
discussedfurtherin the nextSection.
5. FAIRNESS AS EQUALITY
We have considered and rejected the claim that the "equcllity'*
principleis essentialfor the orderlyliquidationof companies,and
that it underliesimportslnt and distinctivefeaturesof the collective
insolvencyregime.This Sectionchallengesthe othermainroleoften
ssignedto it. ThepcWripSStt principlerequiresthatall creditors(sn
positionsof rekltiveequalityas determinedby pre-insolvency law)
should be paid back the same proportionof their debt in their
debtor's liquidation.Since this type of ''equvllity''represents
fslirness,
runsthis argument,the ruleensuresall creditors ptlri passz
clretreatedfairly.Keay and Waltonclreof the view that "[t]he

underlyingaim behind the use of the equalityprincipleis to
producefairness,so that every creditoris treatedin the same
way"."7As noted above,they arguethat to abolishthis principle
wotlld be to returnto the ''medisleval'' policy of allowingthose
witllthe greatestresorces and powerto deprivepoorerandweaker
creditorsof anythingin thelrdebtorssinsolvency.l% This wouldbe
normatively unattractive. Several other commentatorshave
suggestedin a similClr vein that the "equality"principleenshrines
Edirnessin liquidsltion."9
The debate about equalityas a politicalidecllis long and
complex.'20 Thereis no question,in an articleof this nature,of
doillgjustice(as it were)to the issueof the typeof equality,if any,
that should be enshrinedin a law or the law as whole-as a
givetl in Goode, Insolvency, pp. 170-171, which are consistent with thc analysis in this
See:lion. it is respeclfillly suggeslcd thc PortbZ.ve decision is quile unsati:;f.clory.

1l7 "Preferenli.ll debts", pp. 93-94, includiltg the rcrcrences in fn. 78.
IlX la)j,/., p. 95.
lp See e.g f;inch .llld Worlhillglon, "P(J}-; pbl.v.sl", p. 3; Finch, "P;lri p.lSSU", p. 194, noting
anolher ''tr.ldition.ll justificalion" of thc principic; John McCoid, ''B.lnkruptcy, prefcrences,
an(l efficicncy: An cxpression of doubt" (1981) 67 Virgini.} L.R. 249, 271; Thom3s W:trd and
J.ly Shullntln, "11] defencc of thc l}.nkruplcy Code's r.ldic.ll integr;llion of lhe prcrercncc
rllles vIffccting commerci.zl financing" (1983) 6I Washington Univcrsity L.Q. 1, 16. For :l
rather morc nu.lnced tlppro.lch which still reg;lrds the "eqtlulily" principle :s the defslult rulc,
.see Korobksn, "Contraclarislnism :tnd the normsltive founduticfns of b.lnkrtlptcy law" (1993)
7I Tcx.ls L.R. 541, 601-602 antl 607-609. Sec .llso John Farr.lr, 'Pllblic policy and the p.tri
passu rulc" [1980] N.Z.L.J. 100, who mcnlions the .lrgument thtlt il would be unlhir for
some credilors lo be .lllowed lO COIltrACt OUt of thc liquidation regimc (not just lhc
"cqu;lity" principlc), but finds il "question.lblc", sometimes cven ''wide of the m;lrk"; sec
, 100.
2f' I or jusl lwo opposing views, sec Ron.lld IDworkin, Sozêl e;gl1 Virtc: TJle TlleXor! (lXxl ProcIice
oJ E(JIzllir! (H:lrv.lrel University Press, Cambridgc. Mass., 2000), .Ind Jo.ceph R;lz, TJ1e
Af¢srlir! of Fre*enJ{JwJ) (Oxford, Cl.lrcndon, 1988), Ch. 9. A very useful ovcrview of the issues
is follnd in Goscp.lh, ' Equoslily'', in Z;llla (ed.), Tlre Stnz1for(1 Elzcclope(Ji(l of Pllilo.sopSly;
U R L = http://pl;lto.st.lllford.cdu/entrics/equxllily/. For the reasons given therc (see csp.

Section S) alld othersN il is submillcd that Raz's .wlt,xck on cqtlality as a distinct political and
moral virtue is simply unten.)blc.

C.L.J. ThePari Passu Mytla 607
fairness.This is especiallytrue when, clS here, the
representing
notionof "fairnessas equality"is only one of severalissuesto be
considered.So the discussion here will be a sumlllaryone.
However,st is suggested that even this should sufffilce, clt the very
least, to cast serious doubt on the claim that the prz; ]2ct,S.St
principle conduces to fairnessin liquidatiol1.
There can be no doubt that real equality is a some would say
the only-form of fasrness.But a set of laws enshril1esreal equality
only when it treats all those subject to it sIS equals. However,
"[t]hereis a diSerencebetween treatingpeople equally,with respect
to one or another commodity or opportunity,and trecltingthem as
equals".121 It is this crucial distinction which is universcllly
overlookedby supportersof the pari pVlSSI principle.
Let us distinguish, in a rough and recldyway, between formal
and real equality. In the relevant context, fcXrn?al equcJlilJt holds
when the same rule applies to all people. That everyollemust stop
at a red traffic light is an example. This type of equality, while
undoubtedly important, results in a fairly superficitli form of
fairness, the limits of which are easy to expose. lt is not obYioUS\y
fair to insist that an ambulance should be obliged to wait at the
red signal just like any other vehicle, even thollgh carrying a
seriouslyill patient. That access to a buildingis provided"equally"
to all by way of a steep staircasedoes not necessarilypreventthose
using wheelchairsfrom belng treated unfslxrly.Or think of a flat-
rate income tax: regardlessof how much you earn, let LISSely250/o
of your annual income is to be paid over to tlle state. Many
( perhaps most) readers would intuitively find this method of
taxation normativelyunappealing.ThKltyou clreto be deprivedof
the same proportion of your income, whetheryou eclrn£10,000 or
£10m per annum, would not strike them as pclrtictllarlyfair. Note
here the parallel with the pari passu rule, which representsthe
decision that all creditors are to be deprived of the same
proportion of their debts, should their debtor become insolvent.
The problem is that a rule based on formal equalitydoes not take
into account important ligerences between people, even though
those differences are relevant to any consideration Of the rule's
fairness.Of course equals must be treated as equals, but who is to
be consideredequal to whom, arld in what respect?Merely formal
equality might resolve these vital questions by referenceto trivial,
or irrelevant,or meaninglessattributes.But for equality to resultin
fairness (a morally charged concept), the determinationof who
constitutes an equal must be based on charClcteristicsthat
121 Dworkin.Yirtze, p. t1.

608 Lrilz}Journal
TlzeCan1hrin1ge [200t]
tllemselvesare morally significclnt.So a rule based on formCal

equcllityis oftenemptyof normativecontent.To treatpeoplewith
only formalequalityis frequentlynot to treatthemclS equals.
Howtlo we treKlt people,then,in orderto treatthemas equals?
One slttemptto describewhat this entailsin the specificcontextof
corporclteinsolvencyis the Rawlsianframeworkof the Authentic
Consent Model.'22The Model suggests parties (Ire tresltedas
equals--and thus fairly --when their respective interests (lre
accordedequalcare clndrespectin the selectionof insolvencylaw
principles.Spclcedoes not allow a fullertreatmentof this Model
here.However,the discussionwhichfollowsshouldbe regardedas
flowingfrom the considercltions identifiedas relevantin it, and
frolll the methodologyit enshrines.Let us considerthe proposal
that in orderto ensurefairnessin the distributionof assets in a
corporateliquidation,all those who hold a claim which non-
insolvencylaw determinesto be formallysimilar,are to get back
the sameproportionof whcltthey are owed.It is suggestedthat in
this generalform, this proposalis unclcceptslble. The reason is
strolight-forvvard.Non1-insolvencylaw does not neevS to determine
the prioritystatus of types
different of creditor, since for most
solventdebtors all creditors get everything they are owed.'23 For
that reblson,non-insolvency law makes few formal distinctions
betweenvarioustypesof clclimant. The unsecuredclainaof CIbank,
cl tax liclbilityowed to the Crown,and the unpaidwages of (In
unskilledworker,all have the same pre-insolvencyform. Non-
insolvencylaw often does not resolvean issue whichis (almostby
definition)peculiarto insolvencyitself-who shouldbearhow much
loss when (I companyis renderedterminallyunableto meet its
obligations?l24 So when an actor does becomeinsolvent,to seek
guidancefrom non-insolvencylaw to determinehow diSerent
clslimants oughtto be treated (tSthe pari pa.s.sl principlepurports
to do is to committhe old formalisterroridentifiedabove. The
''equcllity''principledetermineswho counts as an "equal" by
referenceto an attributeof the clalmants(i.e. the non-insolvency
foem of their claim) which is irrelevantor trivial or meaninglessas
reglrds the CIppropriateness of any method of distribution of an
insolvent's estate.
This point can fruitfully be explored further. Let us isolate the
issues of interest to us by making two assumptions.First, suppose
there are only three types of creditor, commercial banks, the
122 Workedout t somc Icngtllin Mokal, "AuthenticConsent".
p. 39.
123 TlliS point iS m.ldcby Goodc, AZ.v(llsesl1cZ}
cven hcrc,
t24 There ,IrC SOlilC CXCCptiOllS, mosl l)ol.lbly tllc St8IUS of secured cl;lims. Bul
insolYcncyl;lWmust consider whetherto t.lke vlccountof the pre-insolvencyform of lhe
cl;limfor mc.tningfulrc.lsons,not becauscit felishizesform.This is touchedupon below.
C.LzJ. TJte Pari Passu M32tJ1
609
Crown, and the debtor's employees.'25And second, pretend that

the bankrupt'sestate must be (lllocated without reference to the
parties'own pre-insolvencyinterests(tnd commitments.l26Now it is
obvious that banks lend to thousandsof compslllies(or more) clnd
are therefore well-diversified.Banks can bCllslncethe harm of
receivingsomewhatless in the insolvencyof some Of tlleir debtors,
againstthe profit they make from lending to the mclnymore who
pay back every penny with interest. By virtue of being repeat
players, they have accumulatedexpertise in (lssessing the credit-
worthiness of their borrowers. And since they are strong
commercialplayersin an under-diversified marketfor the provision
of credit,'27they have a strong influence on the terms on wllich
they lend. So bank-credstorsare very well-placedto desllwith being
paid back less than they are owed sn any individualinsolvency.
On the other hand, employee-creditorsmight often be dependent
solely on their salaries,might be unable to diversifyby working for
more than one employer,might have no insurancebecausethey are
not able to join a trade union which would buy such instlrslncefor
its members,might have had no influenceover the terms on which
they were employed and thereforebecame creditors,.lnd might be
unablequicklyto find work on being deprivedof a job by virtue of
their employer'sinsolvency.;28Employeesmight be owed wslgesfor
severalweeks or months, having suppliedservicesto theit company
while it was in financial distress without denlanding pKlymenton
time, in the hope that the company would recover.Such employee-
creditors might suSer serious detriment if they lose too greslt a
proportionof their outstandingdebts.
Viewed thus, the suggestion that bank-creditors(nd employee-
creditorsshould both be treated "equally"by being paid back the
same proportion of what they are owed, seems absurd. Thslt the
two types of creditorhold claimsjudged under non-insolvencylslw
to be formally similar to each other does not cKlrrytoo much
weight. To treat these parties as equals in their debtor's insolvency
requiresthat those in a more vuinerableposition in their debtor's
insolvencybe given greater protectionthan those belter slble to deal
with the loss. Fairnessdoes }10t result from treCltingthe two types
of creditor"equally",so the pari psS.S'It principle stsltedbroadlyas
12S WE also ignore for the momcnl thc employcc-creditors' rights tIn(ler thc Employtltent Rights
Acl 1996. Th.lt is discusscd in the next Scction.
126 For two reasons. this assumption must bc trc;llcd with the
gxreatestcaulion. Firsl, it is
difflcull to sustain cohercntly and without self-contr.lulietion. And secontl ,|nd despitc this
seemingly f.ltal fe.lture, it hsls bocn unconsciously .Iccepted ;un(Jbcon lhe C.lil.SC of m.lny
problems in insolvency schol;lrship. Both thcsc points sIrelouchcal upon below.
27 Von Cruikshank, co}1peEitiorZ (HMS0. 20A), pp. 149 .Inul 155.
in UA' Btll2A-ing
X8See e.g. Mokl. "Authentic Consent", Scction 12; rlnd Ke;y vInd W.lllon, "I'referenlsal',
pp. 95 and 99; but sec aIso pp. 10s101.
610 Tlte cantbriclgeLstsvJolarnal [2001]
above-should be rejected outright as applied to bank- and

employee-creditorswith ciclinls similar to each other under non-
insolvency law. It is submitted the same reasoning holds n?lifultis
wlutandisfor the vsiriotistypes of creditordiSerent in this morcilly
sigilificclIltWcly,regardlessof the formallegll natureof theirclaims.
So for example, the principlesof distributionresulting from this
exerciseare more likely to give employee-creditors at leclSt cl degree
of priority in their enlployerzsinsolvencyover most other types of
Clailllsint. ]29
It should be emphClsised that the extent to which creditorscire
vulnerableto serious hClrmin their debtor's insolvencyis only one
of severKllrelevant considercitionsin determining their proper
rsinkingin corporate liquidation.The point here is not to identify
cill such factors (or even to defend the preferentialdebts regimeas
it stands today), but rather, to cast doubt on the Itciripa.sst(
principle as the guClrdianof fairness in liquidation. It should be
obvious its crude "equality" is almost entirely unattractiveif we
wish to treat <l11the psirtiesas equcils.
This concludes the argument that the pari passl/ principle has
nothing to do with fclirness.But to leave this discussion at this
point would be profoundly misleading. Recsill the second
<ssumption made above, that in choosing principles to govern
distributionof Klninsolvent'svIssets,we sire unconcerned(tbout the
parties' pre-insolvency rights and obligations. This assumption
llowed us to focus narrowlyon whether"equality"of distribution
in corporate liquidation is normativelyattrClctive.But while useful
Cor thclt purpose,it is problematicand of course totally
counterfactual.Creditorsof cl firm which becomesinsolventdo not
suddenly develop a completelynew set of interestswithout link or
connection with the intereststhey had before this particulardebtor
became unable to pay its debts. In their capacity as actors on the
commercial stage, they do not undergo 'd re-birth which purges
them of pre-insolvency commitments. Their interests and
obligations within liquidationllow from their pre-liquidationones,
(wnd(lre inextricably linked. So for example, to accept the very
existence of claims stgainst the now-insolvent compciny is to
cicknowledge this inseverable link with the pre-insolvency
commitmentsof the tctors. And one of the reasonswhy employees
swremore deserving of protection in thesr employer'sinsolvencyis
their pre-insolvencyinulbilityto diversify,and (for many employees)
to have an cippreciablesay (zbout the terms of their employments
etc.
129 CompareIA, s. 175 (slnds. 386), and Sch. 6, whichcre.tte. priorilyregimcfor (istler ol(J)
cmployee-credilors.
This sllpersedeslhe "cqu;llily"principlecnshrinedin e.g. 1/\, s. 107.
C.L.J. ThePari Passu Myt/1 611
lt followsthat, while the pre-insolvency Jorfn Of claims might

not matter,the pre-insolvency intere.sts ncl otligcJtiOwas of all the
partiesmust always be taken into considerationwhen deciding

aboutthe priorityof certaintypesof claimantoverothers.Fairness
demandsthat each claimantbe accordedequsllcare clndconcern.
But this involves looking at the {Otswlily of the intelests and
obligationsof each. So the principlesof insolvencylaw, though
dealingexclusively withpeculiarinsolvencyissues,shouldnot focus
exclusivelyon the interestsof partiesonce a relewcfet rzctoz is cwlreQ{vv
insO/Ve}1t. Rathers they should aSectthe partiesin clWslywhichpays
equalattentionto both their pre- and post-insolvency interestsand
obligations,conceivedof as the continuities that they actuallyare.
So the distributive principlesof insolvency 1CIW should upholdany
pre-insolvency priorityarrangements which, for exclmple, servethe
ezltirety of the interestsof eachof them. This despite the fact thclt
those arrangements do not serve the post-insolvency interests of
some of them.One of insolvencylaw's morechallenging tasks is
therefore to distinguish between pre-insolvency priority
arrangements whichare mutuallyadvantageotls to all the relevant
parties,and thosewhichare merelyexploitative. The lltter mustof
coursebe ruledout, but it wouldconduceto fclirness(wctually to
giveeSectto the unequaldistribution resultingfromthe former.l30
ROLEOF EQUALITY
6. THEPROPER
The argumentso far has concentratedon what the pvJriprts.zt
and formalequalit in genercll,
principlein particular, do fzoldo. It
would perhaps be useful to add a word hexeaboul what ill fact
their actual role is. Formal equalityoperates in three types of
situationsin liguidation,always for the same reason. First, let us
itself.
considerthe pari pRJSSIl principle Commonly ullderstood (IS
governingthe claimsof generalunsecured creditors,it is submitted
that this is not primarilya rule of distributionsIt 11. On the
The clrgument
contrary,it is a ruleof 10n-distribution. herecKlnbe
brokendowninto foursteps.
First,certaintypesof claimare considered"important", in the
sense that they should be met to a signiiicantdegree most in
insolvencies.To ensurethis is the case, they are allottedspecial
prioritypositions,eitherby the partiesto commerciCll transactions,
or (wherethe partiescannotbe trustedto reflchthe rightresult)by
Parliamentitself. Second, not to provide (I particularpriority
positionfor a type of claim is to ensureit will receivelittle or
nothingin most insolvencies. Thirdand followingfromthat, there
130 are exploitativeis left for .Inotherday.
The questionwhelherordinarysecurityarrangemenls
must still be a fall-back provision which covers the treatment of

theselatter claims. In view of the paucity of value to be distributed
to those holding such claims, it is especially important that the
implementation of this fall-back provision in individual liquidations
should be cost-effective. Fourthly and finally, the conclusion is that
the pari passu principle is the ideal fall-back provision. This is the
basic structure of the argument, and it must now be fleshed out.
Let us begin by noting once again that in any formal insolvency
proceeding, different claims are treated according to different
priority rules, depending both on who holds those claims, and what
sort of assets the claims are being applied to. Creditors able to
assert set-off rights created and mandated by insolvency law beat
all others to the extent of those rights. For assets subject to fixed
charges, the chargee of course ranks first.131 For trade goods
supplied under an acceptable ROT provision, the trade creditor can
reclaim them. For goods subject only to a floating charge, post-
liquidation claimants rank ahead of preferential creditors who rank
ahead of the floating charge holder, and so on. All these priority
rules are thought to have different rationales. For example,
insolvency set-off is said to be based on consideration of fairness.132
The priority of (some) secured creditors, and of trade creditors with
ROT's, arguably stems from strong efficiency considerations and is
mutually advantageous to all.133 Post-liquidation creditors are given
precedence because they cannot be expected to subsidise pre-
existing claimants. Preferential creditors are said to be worthy of
special treatment because they do not choose their debtor in any
meaningful sense, do not negotiate the terms of their loans, and (in
the case of employees) might be undiversified.134 The list goes on.
The different priority rules are all complex. It takes time, resources
and effort for Parliament on the one hand, and debtors and
creditors themselves on the other, to decide what types of claim
should rank in what order, with respect to different types of asset.
Of course, however, the state of insolvency is by definition one
where the debtor cannot fulfil all its obligations. (As already
suggested, priority are
rules really crucial only against this
background of insolvency.) What we would regard as general
unsecured claims, then, are those for which neither Parliament nor
131
Exceptin the charge-backsituation,whereconsistencydemandsthat the partyable to asscrt
set-olT shouldbc given prcccdencc;see Mokal, "Resolving".
132For rights scc
example, ibid.,p. 112, fn. 40 and the accompanyingtext.
133There is a vast literature on the subject.Scc especiallySteven Schwarcz,"The easy case for
the priorityof securedclaims in bankruptcy"(1997) 47 Dukc LJ. 425; for reasonssimilar
(but not identical)to those he suggests,the priorityof securedcreditorsis beneficialfor all
the Furtherdiscussionis beyondthe scope of this paper.
134See partiescollcctively.
above; see also the discussionin Keay and Walton,"Preferentialclaims",who argue
againstelcvatingthe Crownand employeesto preferential status.
C.L.J. T/wePari Passu Myt/1
613
the parties themselves have provided specific rules of distribution.
This must be viewed in the context that generally, only secured,
post-liquidation and preferential creditors get anythiIlg in their
debtor's insolvency. There is little or (mtlch more frequently)
nothing for those rclnkingbelow them. So the interestsregardedclS
more worthy of attention (Ind thereforecargutblymorc importslnt)
by the rule-makers(public (lnd privclte)Clregiven precedenccwith
respect to particular types of clsset, in certClinsitucltions, to (1
specifiedextent. To decide not to provide for such .I priority for sw
type of claim is in fact to decide not to hclveit met clt Clllin most
insolvencies. And it is this reasonillg whicll provides the crucisll
insight into the true role of the "equsllity"norm. It WslS suggested
above that pclri pASSM should not be viewed ilS a Sle.fbtult rule. It
cannot accurately be regardedas the stclrtingpositioll, depslrtures
from which must be explained. Instead, it is now submitted, the
rule is best seen as a fall-backprovision. It is the rulewhich tclkes
over when it would be pointless to provide any other.
Here is the argumentagain. Some types of claim clreregarded(s
important, and rules are provided to govern how they should be
dealt with in insolvency. But once this is done, nothlng (or not
much) would be left for distributionto other creditors. Recall thslt
most insolvency proceedings(75°/0 of them ol more) yield nothing
for general unsecured creditors. And when they do bring some
returns,the yields are fairly small (about 7 pence on the pound on
average). So there simply is no point in deciding how tllese claims
should rank *is-a-viseach other. For such claims to be governedby
the paripCzSSll rule makes very good sense, since the costs in terms
of time, effort, and resources required to determine t/?eir
appropriate (fair clnd efficient) rankings would fslr exceed clny
benefits.Why waste resourcesidentifying;lnd klying down diflerent
priorities, when it is obvious hardly any assets (lre likely to be
distributed according to them? For such (l situcltion, in fclct,
"equal" treatment is ideal. In most instances, this sinlply meclns
some types of creditor equally get nothing. In the remslining
minority of insolvencies,the tiny amounts availslblefor distribution
are all distributed proportionately,rather thsln being wasted in
ascertaining the claimants' correct rankings. The pari pCl.5'.$'tl
principleapplies, then, wheneverthe costs of providingfor diSerent
rankingsfor diSerent claims would exceed the benefits.The claims
it governs mostly and R?ecessaril)) constitute something
approachinga distributivelynull set; they are held by those who
will not receiveanything. lf they do receivesomething,it wouldnot
be much. It is for this reason that the ''equcllity'3principleis most
accurcately regardedas a rule of non-distribution.
Now for the second

application of formal equality in corporate
liquidation, which lies in the treatment of the same "type" of
claimant. For example, claims of all employees are treated
"equally" and given preferential treatment over most other
unsecured creditors. It was argued above that employees might be
more deserving of protection in their employer's insolvency than
other types of creditor, since they are more vulnerable to greater
harm in these circumstances. But of course this is not equally true
of all employees. It is
not obvious that computer engineers,
software designers, commercial lawyers, and others with scarce
skills are in need of the same protection as unskilled workers. And
one Information Technology expert might be much better placed to
deal with the insolvency of his employer than another, perhaps
because the former is younger and therefore considered more (re-)
employable in that young industry.
But it makes sense nevertheless to treat all of them the same,
simply because it would be too expensive to require the liquidator
to investigate the relative positions of all the claimants in terms of
vulnerability to serious detriment. What is more, it would be next
to impossible for him to determine whether a particular employee
was more vulnerable than others in this insolvency because, for
example, he had been less cautious in planning for such a
contingency than all the others, or because he had more expensive
tastes for consumables like holidays, etc.135 Most liquidators asked
to embark upon such an exercise would necessarily exhaust all
available assets along the way, and no one would get anything.
Apart from being inefficient, wastage of this nature does not lead
to fairness either. Again, then, "equality" is resorted to because the
costs of employing any more appropriate method of distribution
(including one which is fairer in the abstract) would outweigh its
benefits.136
The third manifestation of formal equality has already been
mentioned. Preferential claims are also treated "equally" inter se. It
is interesting to note that even here, the reason behind this seems
to be exactly the same. Notionally, of course, employees and the
Crown are the two types of preferential claimant. But the
employees of an insolvent firm, in recognition of their especially
135These factors would be relevantfor
determiningthe appropriatcnessof any method of
distributionaccordingto any of a numberof theoriesof fairness.
136The limits on how much of the sums owed to
employeesrank as preferentialdebts can be
seen as a more cost-effectiveway of ensuringthat only the most vulnerablewould truly
benefit from the preferencesregime; for details of these limits, see Keay and Walton,
pp. 91-92, includingfn. 54. The law of diminishingreturnssuggeststhat the
"Preferential",
more vulnerablethe claimant,the more importantit would be for him to receiveeven a
smallersum, and vice vcrsa.The implicationsof this law seem not to have been noticedby
Finch;see "Paripassu",p. 209.
C.L.J. TlaePari Passu Myllz
615
vulnerable position, have been accorded rights which iEt tltcXir
capacit)} as creclitors make them almost unconcernedabout their
employer'sinsolvency.This is becauseof the provisionsof what is
now the Employment Rights Act 1996 (ERA). This regime
"provides for diSerentand generallymore extensive protection for
an employee than under the Insolvency Act".137 Under it, the
Secretary of State, through the Redundancy Pclyment Servicez
makes payments to employees from the National InsurKlnce Fund.
The ERA scheme covers (illler czlia) up to eight weeks of llnpaid
wages and salaries, wages during the statutory minimum notice
period, up to six weeks of holiday pay, and a basic award for
unfair dismissal.These paymentsare likely to be larger than those
given preferentialstatus by the InsolvencyAct. For the prlyments
made, the Secretary of State is subrogslted to the employees'
rights.l38
Relevant to our discussion is the fact that, "once employees'
rights under EiRA are factored into the overall picture ..., the
Crown, by subrogation, takes over the claims of employees in a
very large proportion of cases and is often the sole preferential
creditors'.l39Again, then, we have an excellelltexplclncltion(though
historically perhaps a partial one) for the fslct that preferential
claims rank equally amongst themselves.Most of these claims (Ire
held by the same actor, the Crown. So again it would simply be
pointless to provide for diSerent priorities for these claims. Why
expend resourcesdifferentiatingthese claims both eXFtztre lnd ex^
post, when in most cases any such diSerentiationwoulcl merely be
notional? lt is submittedthat this provides furthersupport for the
proposition that formal equality in insolvency law (including that
enshrinedin the pari pslssu rule) is resortedto only when the costs
of providing ot}zerwisewould outweigh the benefits. It is fol this
reason that the pclri pclssu principleis best regclrdedas a fclll-back
provision. lt is submittedthat it plays no otller role in insolvency
distributions.l40
Finally, it should be pointed out that even if llnalyticcllly
accurate,the argumentsmade in this Section are incompletefrom cl
historical perspective.To meet this apparetltdeficiency,here is one
hypothesis.The searchcosts for ascertainingoptimulll rslnkingsfor
differenttypes of claim dependeither on the availabilityof cl theory
'37 Kc.ly and Walton, ' preferenl;;ll p. 100.

138For an account, sec ibi/.. which lhis p.lr;:gr.lphdr.lws on.
'39 Ihin1.
'4° For suggcstions which seem vaguely similar to thc discilssion herc, sce l inch ;nd
Worthington,"Pri p(lS.Vlt'^ pp. I and 3; Finch, 'P;lri p.lssu", 208-209, ;Icknowlcdges .l typc
of wasle-prevention role for thc "equallilyprincipic,bul seems (o reg:lrdtilis vIsonly OllC of
ils manyvirtues:sce e.g. p. 194.
616 Tlte C}??bri/ge Law Journal [2001]
of finclnce,or on (wprocessof trial-error-adjustment by the pclrties

themselves. When the former method is unavailable or
underdeveloped, the time componentof search costs (incurred
is high. So initially,only the more
durillgtriKll-error-cldjustment)
obviousmethodsof distribution (e.g. plri passl), and of bargaining
for priority (e.g. rudimentClry forms of security),which have
thereforebeendevelopedearlier(Indemployedfor longer,wouldbe
cost-eSective.So clfter1543,whenstatutefirstprovidedfor claims
gClinst bslnkruptsto be pXlidin ;4a portion rate and rate like,
ccordingto the quantityof their debt'','4lthis initinllymight in
fact hclvebeenl ruleof almostuniversalapplication,perhapsonly
sectlredand Crowncklimsbeingexempt.'42 Agclin,this wouldhave
beellso not becclusePclrliament and the pClrties themselvesclt thslt
time were fclirerthan they are now, but simply becauseno better
methodof distributionhad then been discovered (i.e. none was
cost-eSective).But as better(fairer and more efficient)methods
were discovered both through trial-error-adjustment the and
developmentof theoriesof finance,przsi/vZ.sSl( would quicklybe
to a merefall-backprovisionevenas slppliedto unsecured
relegClted
ClclililS.
This hypothesispredictsthat unlessall creditorsin real life are
trilly egticll in clll relevantrespects,there would aIwaysbe (ln
incleclsing tendeIlcyfor .1fairawnd efficientinsolvencylaw systemto
dearelop diSerent prioritiesfor diSerent typesof claim,to the full
extelltof clllthe (Issets genercllly in liquidation.This then
clvslilable
impliesthsltattemptsto "equsllise"distributionsto creditorswho
.re differentin relevclnt respectsclre thoroughly misguided,since
theyimpedethe development of a fairerand more efficientsystem.
TAXCLAIMSPREFERENCES
7. THE REMOVALOF
The Clnalysisin the previousSectioIl(Illowsus to examinethe
Government'srecent proposalto remove the preferentialstatus
The proposalis
enjoyedby certaintax claims(discussedsIbove).'43
conceivedcls "<lnimportantclndintegralpart" a packslgeof
of
reforms to corporate insolvencylaw, which also includes the
4i Scc gencratly V. M;lrkh.lm Lcstcr,Victoriazl litsolatt9)tcy:Blkrltptc! lolpti.(sttttlesntfor Dett.
Oelt/C'oZzp(ltt!S$fitJzliog-Up inJNieteer1tJI-Ce*ltilr!E,tiglutl(l(CIarendon, Oxford,1995),Ch. 1.
142 Scc c'.g. M}e' C(l.6C' *)' lllt} BloArpt.s (1584) 2 Co. Rep.25.1;76 E.R. M1, 463-472.Notc
tllcsughth.t lhiS decisionseemsp;lrtlylO bc b,lsedon lhc necd to prevenlwIwrongly
prefcrred crce3itor (;lndthedeblorhimsclf)being.Ibleto secllreimmlJnily fromthccollectivc
b;lnkrllple:yrcgimc; sec pp. 473474:it wouldbc '.wgrc.t defcctin thcl.lw,if,<lltcr... hc
h.lthutterlydiscredited himsclfby bocoming .1b.lnkrupt, thc l.lW shouldcredithimto m.lkc
distributionof his goods to whom hc pic;lsed,being .l b.lnkruplm.ln, and of no crcdit;bul
lhc l;tw ... h:lih alppoititedccrl:lincommissioncrs,of in(liffercile:y .Ind crcdit. to m;lke lhc
distribuliollof his goods lO cvcryone of his crcditors,r.lic ;Indr.lic .llikc ..."
143 Scc (ilC Whitcl'.lper,11Zvl)1le)l()}A (Thc St.ltion;lryoMcc, 31 July 2001).
Sescoll(lC/Zat)Zes
C.L.J. T/le PariPassuMytl1
617
abolition of administrative receivership tllld chslnges to the
administrationprocedureto make it more "s.treamlined", clncithus
the successor to receivership.l44 The White PKlpersuggests thclt in
insolvencieswhere there is a floatingcharge,(wcertclinproportionof
the funds generatedby assets subJectto it would be "rillgfenced"to
ensure that the benefit of the proposed change goes to unsecured
creditors rather than to the charge-holder. 145 The Government
predictsthat the removalof tax claim prefErenceswill bring 'imcljor
benefits to trade and other unsecured creditors, incltlding small
businesses".t46 lmportantly, however, the ''preferenticllstsltus of
certain claims by employees in insolvency proceedings ... within
certainlimits [also discussedabove] will remain,(ISwill the rightsof
those subrogatedto them?'.'47It will be argued in this Section thClt
the proposal to remove the preferentialStsltUS of t.x clclimsis
unlikely to bring any significantbenefit to unsecuredcreditors,and
thus does not fulfil its stated objective. In addition, the proposal is
incoherent.
ln order to evaluate the proposal, we should begin by trying to
estimate the quantum of the additional benefits to unsecured
creditorswhich can be expected to result from its implementation.
Even a very rough estimate requires <wlengthy crllculatioll,(lnd,
because of the imprecisionof the data availslble,the estimsttehere
will indeedbe rough. Bt it will soon become>ppblrenttllat this does
not matter to the point being made here. Unless otherwise stated,
any doubts in the figuresare resolvedso <1Sto maximisethe expected
additionalbenefitto unsecuredcreditorsfrom lile proposedcllange.
At the moment, total liabilities of compslniesthslt unclelgo a
formal insolvency procedure during a year (lre estimcltedto be
about £42b.'48 Of this, about 35°/0 is owed to bslnks.'49Let us
suppose that 80%Ofbank debt is secured oll tlle company's
assets.l5°So securerlcreditorsare owed, rougllly, 28%of the total
outstanding debt. PreMet esatizllcreditors get bclck (Ibout 30°/0 of
whXltthey are owed.Sl The amount clctuclllypslid otlt casdividends
44 Sh,(f., Thc Rt. Hon. Patrici.l Hewitt M.P.. ' Droword'', .Ind ' Corportile Ilisolvency
Proposuls', par;ls. 2.19, 2.2-2.6, 2.l8, .Ind 2.7-2.17.
145 rhltf* par;l. 2. 19.
14h awjtf, *Foroword".
Ihitt. psira. 2.20.
148 ABRP, SrzesS, p. 11.
49 This comcs from thc c.llcuLulion thsil, for thc l:ranks-Sussilisill s.lmple. h;lnks wcre ozted
aboul 40% of lot.ll oulslanding li.lbilitics when firms cnicred lllc '*cca)lrulrcscuc unit" (sec
Cfl^clc,p. 8), and. for lh:lt sub-set which ctcillually cndcat up in lhe "debt recovcry linil" ;snd
hence in ;1 form;ll proceeding, 12% of lh.lt debt w.ls p;lid e114whilc thc leml was in the
'rescue unil" (Clscle,p. 11).
0 Ihi(l.,p. 13. Table 8, gives lhc v.sllleOr coll.tcral ;Is a percenlag5eof b;lnk debt; lhc figure in
the lext is .n estim;ltcd composite.
ISXAgain, lhiS tS a compositc figilre derived froin Franks-SIlssill;lxl, Cyclc, p- 3. .nd ABRP.
Srvey, p. 18.
6l8 Tlle Camh izSgeLtzzJJolfrnctl [2001]
in right of tclx claims preferences is around £1OOm. I52 SO

preferentiCll tax clslims themselves amount to some £333m. The
slmount owed in right of employee preferencesis an estimated
£200111.153 Altogether,then, preferentialdebts constitute clbout I.3°/O
of the total debts owed by insolvent companies. It follows that
lelsecurect creditorsclreowed about 70.7°/Oof the total outstanding
debt of companies in insolvency proceedings. This amounts to
swround £29.69b. They get an >}verageof 7 pence on the pound,'54
or clbout£2. 1b (£2l OOtn)todcly.
Now the Governmentestimates that the removcllof tax claims
preferences would bring "up to" £1OOm more for unsecured
creditors.'55So clfter the removal of preferentialstatus for tax
claims, unsecuredcreditorswill get £2200m.'56In other words, their
recoverieswould go up to 7.4°/Oonce the proposal is implemented.
This is of course an increase of less than one-half of one penny
over whcltthey currentlyget! And that does not take into account
thslt clll tclX claims would then cllSO rclnkalongside other unsecured
claims.'57
It should be obvious, then, thKlteven lf these calculations are
wide of the mark (so that the sIctualincreasewill be twice, thrice,
or even five times this much), the average recovery rates for
unsecllred creditors in an overwhelming majority of formal
insolvencyproceedingsare unlikelyto go up to the extent that such
creditorswould be appreciablybetter off. The Government'sclaim
that this iiimportantsIndintegrllz' part of its reform package will
bring "major benefits" to them therefore seems simply
nstlstainlble. In addition, and in line with the analysis in the
previous Sections, the reader should note thClt it makes very
IS2SM,{}}t(S Clltce, AI)llCX D. p.lr.l.4.15. This figurcis prob;blyover-inclusivc,in linc with thc
pr;clicc herc of rcsolvingdoubls in f.lvour of m;lximisingcxpected .lddition.llbcncfitsto
unsecllredcreditors.
53 Thc figurcin thc tcxt h.s becn incrc.lsedto t;lkcinto .ccount the .lgc of thc dt.l currcntly
.Iv;lil;lblc,vlndmiL;htbc oInovercstim.tc;see the JsJ.Ilinn;ll Audil oR;cc Prcss NOliCC, "Thc
Vcp;lrlmcnlOf Tr.ldc .In(l Indllstry Redund;lncyP;lyment:;Servicc: M.nagemcnt ;ltld
Rccovcryof Dcbt" (17 Oclober 1996);.lv;il.lblc.lt URL: www.n.ô.gov.uk/pn/9596695.hllll
(wllich mcnlions ;1 figurc of r177m); sec .llso Kerly.nd W.llton, "Prefcrcllli.ll",p. 100,
includingfiu.131.
t54 A 13RP, Sl8/-tP!1,
P 18.
ISSSCTC(JO(I C/l(l11(L$,
Annex1D,palr.l.4.15. Ag.zin,nolc thc possiblcover-inclusivilyof lhis ligure.
ISfi Thcsc c.ltcul.tions .rc subject lo thc .lssumplionth.ll in decidinLD on thc proporlion of
flo.llingch;lrgeasscls to hc "ring,fetlced" for unsce:ure(l
creditors,thc Govcrnmcntwill be Iruc
lV its word lhat their prczposcsl ch.nges woukl nol advcrscly.lffect lhc inlerestsof secured
creditors;SE}CO)l(ICXJ{BJTCCXS
p:lra.2.().
57Also ignorc(lis thc filCt th.ll thc tlbolilionof rcccivcrship would removcthc costs of reccivcr
"opr)orlullislll";sec } rslnksllnd Sussm.lll,**Rcsolving financialdistrcssby Wslyof ow contract:
An cmpiric.llsllldy of smllll UK comp.lnics"(22 October,2000), p. IX;the p;per is .vaitslble
al URL: www.iJk-cEs.dc/p;lpers/frllnks.pdf. Howevcrsthesc costs are rci;tively quitc smllll,
sincc they only .lrisctn .|(lminislr.ltivcreceiverships,
olndthen only in .I proportionof those
c.l;cs wherc lhe rccciYcr's rIppoinloris not fully plli(l.Their climin;ltionis unlikelyto m.lkc
.ny noliccablediffcrcncclO thc rcsull.
obvious to subject to the pari passu rule the tiny additional

sense
sums which become
will available in many formal insolvency
proceedings because of the proposed change. For these additional
sums, it would be entirely wasteful to attempt to think up some
other set of priorities. The costs of doing that would be quite
unjustified in view of the size of the expected benefits.
So much for the suggestion that the proposal is likely to be
inefficacious. To understand why it is incoherent, we should recall
that, because of the rights of employee-creditors of insolvent
companies under the ERA, the claims apparently held by them and
given preferential status, are mostly vested in the Crown by way of
subrogation. So preferential tax claims and preferential "employee"
claims are in most cases held by the same actor. Nor does this fact
go unnoticed in the White Paper. As already mentioned, the Paper
not only states that certain employee claims will retain their
preferential status, but also explicitly includes within this
reservation "the rights of those subrogated to them",158 or in other
words, of the Crown itself. Now the supposed rationale for
removing the preferential status of tax claims is presumably the
well-rehearsed one that the Crown is better able to absorb the loss
of not being paid by some of its debtors, than are some other
categories of creditor, for example, weak trade creditors.159 But if
this is accepted, it surely follows that "employee" claims, also
generally held by the Crown, should lose their preferential status
for exactly the same reason. Employees might deserve greater
protection in their employer's insolvency than other types of
claimant, but if
they have already been reimbursed from the
National Insurance Fund, then the competition is no longer
between them and other unsecured creditors, but between the latter
and the Crown. So there seems little sense in suggesting reform to
only one category of preferential claims, when the reason why that
reform is considered desirable is equally a reason to change the
other category as well. This is especially relevant given that the
stated aim ofimproving the prospects of unsecured creditors is
expected to be fulfilled to a negligible degree in any case.160
At the very least, the Government bears the burden of showing
what makes
preferential tax claims different from most preferential
"employee" claims. One way in which it might attempt to do so
would be to provide better data than is currently available, and
thus rebut the premise of this argument, that the Crown holds, by
158SecondChance,
159This is "CorporateInsolvencyProposals",para.2.20.
implied in the "Foreword"to the White Paper;in any case, no other rationaleis
there.
160suggested
It should be noted the point beingmadeheremerelyaddressesthe cohcrcnccof the proposal,
not its overalldesirability.
620 Lat} Journal
TlzeCtJmbricSge [2001]
subrogation,most preferential"employee"claims. But even then,

the obvious solution would be to adopt the approach enshrinedin
the US BankruptcyCode, which providesthat an entity subrogated
to the rights of, inter alis, the employee-creditorsof a bankrupt
conlpany, is not entitled to enjoy the statutory preferentialstatus
provided to some of their claims.'6 This would ensure that the
preferentisllstatus of "employee" debts was retained only to
the extent that employees themselveswould benefit from it. Unless
tlle Governmentexplains why this is unacceptable,it seems difficult
to clvoid the conclusion that its proposal is based on an arbitrary
and thus unjustifiabledistinction.
8. CONCLUSION
Some years ago, Bridge concluded his brief review of the clash
betweenpari passu distributionon the one hand, and the freedom
of contract which allows parties to grant and take security on the
otlIer, by framing the issue thus: "Is the pari paSSll principle so
strong that the burden of proving efficiencyrests upon those who
support securedcredit, or is freedonzof contractparamountso that
the burden falls upon those who oppose security?"'fi2 Even without
invokingfreedomof contrXlct,z63 here (it is submitted)is the answer.
The first premiseof those ctttackingthe priorityaccordedto secured
claims-that unequaltreatmentof claims is anomalous,somehow a
deviation from the "strong" "equality" norm is quite false. If
(nylhing, it is the prJripassu principlewhich constitutesan isolated
enclslveof"equality" in a (formally) unequal insolvency world. In
thslt real world, its statusonsidered as a rule governing
distribution of assets-hovers somewhere between falsehood and
tslutology. So with respect, assertions that this principle is all-
pervasive in the liguidation regime, that it underlies some of the
best-knownavoidance provisionsof thslt regime, or that it provides
the only cllternativeto an undesirablefree-for-all,all stand rebutted
cls bslsed on cl fallacy. They must (lll be abandoned. So must the
argtlment that the pri passu principle is necessary to ensure
fairllessin liquidation.
It is submitted that it is the critics of diffieringpriorities for
dilTerenttypes of claim, including those attacking the full priority
of secured claims, who must now be on the defensive, at least on
these grounds. The general rule in insolvency law, its deeply-
embeddednorm, seetus to be that the assets available in insolvent
IGI Scction507(d).Many tilanksto Look Ho for dr.wing .lltentionto this.
p- 342-
*QuiNtclose*ss
|62 13ridgcs
163 Silice Parliamenlitscif (and not just the purtiesin commerciallransuctions)h;ls reducedpari
pasnl(to the sh.lm thal il is.
estates are to be distributed "unequally", unless attempting to do

so would be pointless because wasteful. It might be that the
different priorities afforded to different types of claimant are
sometimes arbitrary. It might be that this area of the law could do
with extensive re-thinking and rationalisation. Even then, it would
not follow that what should replace the current system is one which
crudely equalises all creditors in their debtor's insolvency. Formal
equality of that sort is not the natural alternative. It will not win
by default. Not only is it rare and unnecessary in the real world, it
is also useless as an ideal. So it must be argued for as much as any
other system of priorities proposed as a replacement for the current
one, and it would be at least as contentious as any of them. Those
arguing for (a more) "equal" treatment of all claims must therefore
bear the heavy burden of showing why moves towards formal
equality are desirable.

Priority As Pathology The Pari Passu Myth

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Priority As Pathology The Pari Passu Myth

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Editorial Committee of the Cambridge Law Journal

Priority as Pathology: The pari passu Myth

PRIORITY AS PATHOLOGY:THE PARI PASSU

lesser objections to the existence of securedcredit, concludes thclt

from ours in geography and time.5 In English law, statute itself

has no to play in ensuring

ways. Most obviously, it ignores the received understanding of the

2. The Myth of Pari Passu Distribution

Despite the hold

debits or otherdeclllngs,the creditorable to assertset-offrightsgets a

Finally,varioustypes of debt have been deferredby statute.

"normal rule", while patently substantial, miglll ill flct be

goods sold, (lnd rights of stoppage in trclnsit.4() If the insolvent WClS

to have been providedby bslnks(who oftell tslke security), 27% by

Sh IA s. 213 (fraudlllent lrlding) 214 (wrongfill lr.ding). s. 215(4).

41 Third Pilrtics (Rights Agstinsl Insllrers) Act 1930, s.

p. 7 shows lh;t il1 lhe yeslr to Juxlc 15)99,88.5'Mo Of comp.lnicSwhich bcctillicsubjcct lO s1

by other individuals, 4% by other sources, 3% by venture

creditors* voluntary liquidations, and 78% of compulsory

repeetted. Muchof sciencecouldnot progresstill it had rejectedthe

And for Finch, the "equality" principle "conduces to an orderly,

Finch, "Pari passu", p. 194, noting a "traditionaljustification"for the principle.See also

arguments commit what will be referred to as the immunity/priority

See Mokal, "The Authcnlic Consent Model: Contractarianism,Creditors' Bargain, and

to queue up to have access to the pool. Voidable preferences and

Similarly, if certain attempts to gain preference are undesirable,

focus on the "equality" principle can be positively misleadingin

... a person cannot make it a part of his contract that, in the

But neither of these (nor any other portion of the judgments)

only equal distribution is, with respect, quite wrong, since it is at

The sceptical reader should turn to Ncttioe1blWest/wlil1ster Bonk

the winding-upof insolvent estates. Not only is it forbiddenfor a

by way Ofinsolvencyset-off)is everybit as bindingas the equality.

/w1re}Dste e (1874)9 Ch.App. 293.

But even Lord

registered.92 So the objection was not to the granting of immunity

sufficient but not necessary condition, since the initial distribution

yet anotherexception(if the BritishEagle decisionwere to be taken at face value) to the

would have prevented the trustee being.lble to makel collective

immunityfrom the rules of the liquidationregime is Re Mrzx^lle11

This decisionshouldmakeit clearthat the pari pcz.ssl(principle

with M plc.'s othercreditors,were relegatedbecause of the terms

This agasn is sufficxentbut not necessarycondition,and is a

discussedfurtherin the nextSection.

clretreatedfairly.Keay and Waltonclreof the view that "[t]he

See:lion. it is respeclfillly suggeslcd thc PortbZ.ve decision is quile unsati:;f.clory.

U R L = http://pl;lto.st.lllford.cdu/entrics/equxllily/. For the reasons given therc (see csp.

moral virtue is simply unten.)blc.

121 Dworkin.Yirtze, p. t1.

tllemselvesare morally significclnt.So a rule based on formCal

Crown, and the debtor's employees.'25And second, pretend that

above-should be rejected outright as applied to bank- and

lt followsthat, while the pre-insolvency Jorfn Of claims might

partiesmust always be taken into considerationwhen deciding

must still be a fall-back provision which covers the treatment of

Now for the second

'37 Kc.ly and Walton, ' preferenl;;ll p. 100.

of finclnce,or on (wprocessof trial-error-adjustment by the pclrties

in right of tclx claims preferences is around £1OOm. I52 SO

obvious to subject to the pari passu rule the tiny additional

subrogation,most preferential"employee"claims. But even then,

estates are to be distributed "unequally", unless attempting to do