The pari passu principle in insolvency law: an analysis of the judicial construct and its suitability for modern needs

The subject of this thesis is the pari passu rule in English law. That rule, commonly understood, provides for equal (or pro rata) treatment of creditors belonging to the same class. The rule has been developed through both legislative and judicial activities over a long passage of legal history. This thesis will analyse the construct given to this rule by both legislators and judges, particularly, with reference to the extent it has been adapted to meet the needs of modern insolvency law. Such a perspective is especially acute in the light of recent reforms to the position of unsecured creditors introduced by the Enterprise Act 2002. The effects of the current financial downturn have furthermore focused attention on insolvency law from the perspective of corporate rescue or the treatment of creditors, and the increasingly global nature of commerce has meant that different jurisdictions face similar challenges in the enforcement of their insolvency laws.

This work engages in a doctrinal study which contrasts the conception of the pari passu rule which is widely known and applied (though subject to criticism) with the actual operation of the rule in a private law and public policy context. Accordingly, the development of the rule is traced from its origins to its present application. An effort is made to determine the extent to which the judicial model of pari passu is substantiated in practice and commercial realities. It is argued that this model can be distinguished from the manner in which the rule actually applies in the context of managing the relationship between unsecured creditors within their class, and in the promotion of wider social interests.

Regard is made of developments in insolvency law which may have diminished the view of the rules of insolvency distribution as an indicator of the social values of a legal system. The manifestation of the rule in ‘international insolvencies’ is one such development. An examination of the advent of a more flexible approach to pari passu in international insolvencies would thus be necessary. It will be shown that a revised construct of pari passu which more strongly accords with modern imperatives is needed. This study centres primarily on United Kingdom insolvency law, and draws on the experience of other (mainly common law) jurisdictions to demonstrate important issues in the enforcement of the pari passu rule and provide comparisons, where appropriate.