1 Venessa Finch, “Security, insolvency and risk” (1999) 62 M.L.R. 633, 634 (footnotes omitted). It is unclear whether Finch is making an all-inclusive claim: that the normal rule is that all creditors, of whatever type, are treated equally. If she is, then the claim is too broad; there is not, nor has there ever been, any such “normal rule”. Only those in “relative positions of equality”, judged by reference to the general (non-insolvency) law, are covered by the principle: see Oditah, “Assets and the treatment of claims in insolvency” (1992) 108 L.Q.R. 459, 463. This point is taken up again below. See also Goode, , “Is the law too favourable to secured creditors?” (1983-4) 8 Canadian Business L.J. 53, 58–59Google Scholar, and Goode, , “Proprietary rights and unsecured creditors”, in Rider, Barry (ed.), The Realm of Company Law (London, Kluwer, 1998), 183, 184Google Scholar.

2 Michael Bridge, “The Quistclose Trust in a world of secured transactions” (1992) 12 O.J.L.S. 333, 340.

3 Cranston, Ross, Principles of Banking Law (Oxford, Clarendon, 1997), p. 436Google Scholar.

4 See the excellent study by Andrew Keay and Peter Walton, “The preferential debts regime in liquidation law: in the public interest?” [1999] C.f.i.L.R. 84, 85.

5 See e.g. J. Garrido, “The distributional question in insolvency: comparative aspects” (1995) 4 I.I.R. 25, 29.

6 Insolvency Act 1986 (hereafter, “IA”) s. 107 (voluntary liquidation; however, the section begins: “Subject to the provisions of this Act as to preferential payments …”) and Insolvency Rules 1986, 4.181(1) (compulsory liquidation). The principle can be traced back to the first attempt to deal with insolvency issues by statute; see 34 & 35 Hen. 8 c. 4, s. 2.

7 Goode, , Principle of Corporate Insolvency Law (London, Sweet & Maxwell, 1997)Google Scholar (2nd ed.) (hereafter, Insolvency), p. 142.

8 Insolvency Law and Practice (Cmnd. 8558, 1982) (hereafter, “Cork Report”), para. 1220.

9 Keay and Walton, “Preferential debts”, p. 92.

10 Ibid. The Report by the Review Group, A Review of Company Rescue and Business Reconstruction Mechanisms (DTI, May 2000) reiterates the same orthodoxy; see p. 10 para. 24.

11 References to “equality” (within quotation marks) are to be read as indicating formal equality, defined for the moment as that understanding of equality espoused by the supporters of the pari passu principle; see e.g. the quotation from Finch which opened this Section. This is to be contrasted with the true equality which results from treating people as equals. This is explained in Section 5, below.

12 Re Smith, Knight & Co., ex p. Ashbury (1868) L.R. 5 Eq. 223, at 226, per Lord Romilly M.R.

13 See e.g. Worsley v. Demattos (1758) 1 Burr. 467; 97 E.R. 407, 412, per Lord Mansfield, who identified as one of the purposes of bankruptcy law an “equal distribution among creditors who equally gave a general personal credit to the bankrupt” (emphasis added). So personal creditors but not proprietary ones (both types defined by non-insolvency law) are to rank equally inter se for the purpose of bankruptcy distribution.

14 IA, s. 175.

15 For example, Goode, Insolvency, p. 156, states that “preferential debts rank pari passu among themselves”. See also Finch, “Is pari passu passé?” [2000] Insolvency Lawyer 194, 194 and 199, including fn. 36; the definition of the principle that she embraces in this article seems to be inconsistent with the one quoted at the beginning of this Section.

16 See the discussion above, and especially Re Smith, Knight & Co. (1868) L.R. 5 Eq. 223, 226.

17 See Goode, Insolvency, pp. 152 and 156, and Finch, “Pari passu”, pp. 194 and 195.

18 Insolvency, pp. 142-143.

19 “Assets”, p. 463.

20 Para. 1396.

21 “Preferential debts”, p. 94. It is suggested below that even this might be over-stating the principle's significance.

22 Insolvency, p. 152. Satisfactory or not, the same reasoning applies to hire-purchase agreements and finance leases.

23 Ibid. Oditah discusses four “important exceptions”; see “Assets”, pp. 466-468.

24 Insolvency Rules 1986, r. 4.90.

25 Peal v. Jones (1881) 8 Q.B.D. 147; Mersey Steel & Iron Co. v. Naylor, Benzon & Co. (1882) 9 Q.B.D. 648, (1884) 9 App. Cas. 434.

26 Goode, Insolvency, p. 153.

27 National Westminster Bank Ltd. v. Halesowen Presswork and Assemblies Ltd. [1972] A.C. 785 (HL); see the discussion in Section 4, below.

28 Stein v. Blake [1996] 1 A.C. 243 (HL); Gye v. McIntyre (1991) 171 C.L.R. 609 (High Court of Australia). The relationship between rights of insolvency set-off and those of secured creditors holding charge-backs is itself a vexed one; for the view that in certain circumstances, set-off should operate despite the existence of a charge-back, see Mokal, “Resolving the MS Fashions ‘paradox’” [1999] C.f.i.L.R. 106.

29 IA, ss. 115 (voluntary winding-up), 156; IR, rr. 12.2 and 4.218.

30 IA, s. 233(2)(a).

31 Goode, Insolvency, p. 156.

32 Oditah, “Assets”, p. 467, citing Re Levi & Co. Ltd. [1919] 1 Ch. 416 as an example.

33 IA, Sch. 6.

34 Ibid.

35 Ibid. See generally the useful summary in Keay and Walton, “Preferential debts”, pp. 91-92.

36 IA, s. 213 (fraudulent trading), 214 (wrongful trading), s. 215(4).

37 IA, s. 74(2)(f).

38 Oditah, “Assets”, p. 467.

39 Ibid., p. 469 fn. 67, citing Snells Equity (29th ed.), Chap. 10.

40 Sale of Goods Act 1979, ss. 39 and 41-46.

41 Third Parties (Rights Against Insurers) Act 1930, s. 1(1).

42 See s. 151(5).

43 Finch provides a useful summary; see “Security”, p. 636, and the sources she cites in fn. IS.

44 The Association of Business Recovery Professionals (or ABRP; formerly, SPI), Survey of Business Recovery in the UK: Survey (2001, available at URL: http://WWW.SPI.ORG.UK/9thc/), p. 7, shows that in the year to June 1999, 88.5% of companies which became subject to a formal insolvency proceeding had a turnover less than £5m.

45 In re Kayford (in Hq.) [1975] 1 W.L.R. 279; for a critical discussion, see Goodhart and Jones, “The infiltration of equitable doctrine into English commercial law” (1980) 43 M.L.R. 489. The Re Kayford method seems to have been upheld by the Court of Appeal in Re Chelsea Cloisters Ltd. (1981) 41 P.&C.R. 98, but that case is criticised as “an exercise in discretionary justice” by Bridge, “Quistclose”, pp. 356-357.

46 Bank of England, Finance for Small Firms: A Seventh Report (January 2000), p. 26 fn. 17, referring to Singleton and Wilson, Sources and Use of External Finance: An Empirical Study of UK Small Firms.

47 J. Spencer, “The commercial realities of reservation of title clauses” [1989] J.B.L. 220, 221.

48 Wheeler, S., Reservation of Title Clauses (Oxford, OUP, 1991), p. 5Google Scholar, found that in the fifteen receiverships and liquidations studied, 92% of suppliers had employed some sort of ROT provision.

49 The Cycle of Corporate Distress, Rescue and Dissolution: A Study of Small and Medium Size UK Companies, Institute of Finance and Accounting (London Business School) Working Paper 306-2000, April 2000 (published on 2.11.00).

50 For the three banks respectively, the mean debt owed to the types of creditor indicated as a percentage of total outstanding debt, was as follows: Main Bank 38.2%, 49%, 41.9%; Trade Creditors 24%, 37.4%, 40.2%; Other Financial Institution 2.3%, 2.8%, 7.5%; Other Creditors 29.4%, 8.3%, 8%; “Owner”-Directors 6.1%, 2.5%, 2.4%; see ibid., p. 8, Table 3. More on this in the penultimate Section of this paper.

51 ABRP, Survey, p. 18. This is supported by the Franks-Sussman data, which shows that the median recovery rate for unsecured creditors in a sample of 27 administrative receiverships is 0%; see Cycle, p. 14, Table 9, n. 1.

52 To this author, “normal” indicates a state of affairs which is usual, regular, common, average, or typical.

53 The implications of this distinction between the constitution of claims and the pattern of distribution is discussed further in Section 6 of this paper.

54 These quotations are from Finch and Worthington, “The pari passu principle and ranking of restitutionary rights”, in Rose, (ed.), Restitution and Insolvency (Mansfield, Oxford, 2000), 1, pp. 14–15Google Scholar, 2 and 7, including fn. 33 (emphases added).

55 Insolvency, p. 142.

56 Keay and Walton, “Preferential debts”, p. 95; see also pp. 92-93. Bridge also regards the “equality” principle as reflecting the law's interest in an orderly liquidation; see “Quistclose”, p. 340, though he strikes a note of scepticism on the same page: just how “fundamental” could the principle be “when one [must] look … for it in the Insolvency Rules and not in the body of the [Insolvency] Act itselff?]” (footnote omitted).

57 Finch, “Pari passu”, p. 194, noting a “traditional justification” for the principle. See also Finch and Worthington, “Pari passu”, pp. 2-3.

58 Insolvency, p. 144.

59 Keay and Walton, “Preferential debts”, p. 93, fn. 74, citing Keay, , Avoidance Provisions in Insolvency Law (Sydney, LBC Information Services, 1997), 40–49Google Scholar.

60 “Assets”, p. 465.

61 Insolvency, p. 344; see also pp. 345-348, where the link between the avoidance provisions of the Insolvency Act and insolvency law's “equality” principle is reiterated, pp. 387, 389-390 (preferences), and p. 423, which explains the rule against post-petition dispositions by invoking the principle. Goode does point out, however, that the principle cannot explain certain important nuances of some of these provisions; see especially p. 347; for a dramatic modification of the claim quoted in the text and the references above, see p. 441.

62 See Mokal, “The Authentic Consent Model: Contractarianism, Creditors’ Bargain, and Corporate Liquidation” [2001] Legal Studies 400, 438: “[P]arties in the choice position accept a distinction that will be referred to as that between immunity and priority”. For the ancestry of this distinction, see Baird, Douglas and Jackson, Thomas, Cases, Problems, and Materials on Security Interests in Personal Property (Mineola, NY, Foundation Press, 1987), 67Google Scholar (discussing the “property right” and the “priority right” of secured creditors).

63 IA, s. 123.

64 See e.g. Jackson, Thomas, “Bankruptcy, nonbankruptcy entitlements, and the creditors’ bargain” (1982) 91 Yale L.J. 857Google Scholar, and Mokal, “Authentic Consent”.

65 For example, IA, ss. 239 (preferences) and 127 (post-petition dispositions).

66 The reader would have noted the italicised qualification as significant. Without entering into the debate about its justifiability here, it should be pointed out that secured creditors, for example, acquire both priority and immunity in their debtor's insolvency. See Re David Lloyd & Co. (1877) 6 Ch.D. 339, 344-345, per James L.J.: “[The insolvency rules which deprive unsecured creditors of the ability individually to proceed against their debtor] were intended, not for the purpose of harassing, or impeding, or injuring third persons, but for the purpose of preserving the limited assets of the company … in the best way for distribution among all persons who have claims upon them … But that has really nothing to do with the case of the man who for present purposes is to be considered as entirely outside the company, who is merely seeking to enforce a claim, not against the company, but to his own property … Why a mortgagee should be prevented from doing that I cannot understand”.

67 This contravenes the rule that general unsecured creditors are to be paid nothing until all preferential debts have been fully honoured; see IA, s. 175.

68 Milman, David and Parry, Rebecca “Challenging transactional integrity on insolvency: An evaluation of the new law” (1997) 48 Northern Ireland L.Q. 24, 25–26Google Scholar, perhaps come closest to the view expressed here. See also Worsley v. Demattos (1758) 1 Burr. 467; 97 E.R. 407, 412, per Lord Mansfield, who seems to regard as distinct two types of violation of bankruptcy law which result from a voidable preference. The creditor accorded such a preference gains immunity from the management decisions taken in the collective interests of all creditors by the trustee, and in addition, escapes having to participate in the rateable distribution of the estate.

69 For the “policy of section 127” of IA, which provides for the avoidance of post-petition dispositions of assets, see Lightman J. in Coutts & Co. v. Stock [2000] 1 W.L.R. 906, 909 (and approved by the Court of Appeal in Hollicourt (Contracts) Ltd. v. Bank of Ireland [2001] Ch. 555, 563): the provision is “part of the statutory scheme designed to prevent the directors of a company, when liquidation is imminent, from disposing of the company's assets to the prejudice of its creditors and to preserve those assets for the benefit of the general body of creditors”. Again, the focus is clearly on the preservation of the insolvent's estate with a view to its eventual distribution under the statutory scheme of distribution; needless to say, whether that distribution should be “equal” or otherwise simply is not implicated in the policy of this section.

70 (1873) 8 Ch. App. 643.

71 Insolvency, p. 144. Goode's position is not unambiguous, since his argument on this point is rather brief, and is heavily qualified later on in the text. See also Oditah, “Assets”, p. 464 and the text accompanying fn. 37, who uses ex p. Mackay to similar effect.

72 See 8 Ch. App. 643, 648, per Mellish L.J.

73 James L.J. at p. 647 (emphasis added) (the same judge whose dictum concerning secured creditors was reproduced above).

74 Mellish L.J., at p. 648 (emphasis added).

75 That is the proposition it would have to endorse if it were supporting the “equality” principle. See also the only authority referred to in the judgment, Higinbotham v. Holme (1812) 19 Ves.Jun. 88; 34 E.R. 451, which was directly applied by Mellish L.J. (at 647-648). Here, a marriage settlement provided that in case the husband, having previously been educated for orders, should enter into trade and become bankrupt, his life interest would determine. The husband later entered into trade as a cotton manufacturer, and eventually became bankrupt. Lord Eldon L.C. struck down the relevant clauses of the marriage settlement as a fraud on the bankrupt laws (p. 453). There can be no doubt that “equality” of distribution simply was not at issue. The only objection was clearly to the attempt to evade the disposal of the bankrupt's property by way of collective proceedings for his creditors’ benefit (pp. 452-453). Thanks to John Armour for emphasising to the author the relevance of this decision.

76 See Keay and Walton's summary of the history of “Preferential debts”, pp. 86-91.

77 See Ex p. Barnett, In re Deveze (1874) 9 Ch.App. 293, 295-296, per Lord Selborne L.C. Interestingly, the other judges in this case, both of whom concurred in the Lord Chancellor's decision, were Mellish and James L.JJ., the judges who decided Ex p. Mackay. Being aware of this deviation from pari passu provided by the Bankruptcy Act 1869 (as undoubtedly of the others already mentioned), they could not possibly be taken to be laying down or upholding some overriding or general rule in favour of “equal” distribution in Ex p. Mackay (especially since any such rule gets not a single mention in either judgment). On insolvency set-off, see the discussion in the text, below.

78 See e.g. James L.J., at p. 647.

79 An identical analysis applies to Ex p. Williams (1877) 7 Ch.D. 138 and Ex p. Jackson (1880) 14 Ch.D. 725. In both cases, the mortgagee's right to distrain on the chattels upon the mortgaged property was a clear attempt to grant him immunity from the collective bankruptcy proceedings to which the mortgagors were subject, to the extent of the value of the chattels distrained upon. See also the similar case of Re Johns [1928] Ch. 737. All three cases are used by Oditah, “Assets”, p. 464, fn. 37, as demonstrating the operation of the pari passu principle. For reasons discussed in the text to which this note is attached, it is submitted that they deal with an entirely different point, with immunity, not priority.

80 [1972] A.C. 785 (HL).

81 See the submission on behalf of the company, ibid., p. 792A.

82 Expressly so by at least one of their Lordships; see per Viscount Dilhorne, p. 801E.

83 To similar effect, see e.g. Ex p. Barnett, In re Dereze (1874) 9 Ch.App. 293.

84 [1975] 1 W.L.R. 758 (HL). For criticism of the decision, see the Cork Report, paras. 1341– 1342.

85 Oditah, “Assets”, p. 465; it must be emphasised that Oditah himself is unimpressed by the decision and subjects it to cogent criticism; see p. 466.

86 The rule that all those who correctly answer x number of questions in an exam are to get x marks, enshrines one type of equality. The rule that all those who take the exam are to get x marks represents quite another. The pari passu principle is traditionally conceived as analogous to the former rather than the latter rule.

87 Re Smith, Knight & Co., ex p. Ashbury (1868) L.R. 5 Eq. 223, 226, per Lord Romilly M.R. See also Oditah, “Assets”, pp. 463 and 468.

88 [1975] 1 W.L.R. 758, 777C-H; to the same effect, see Lord Morris (dissenting), pp. 764F, 765A and 765E; and Lord Simon (dissenting), p. 771F-H.

89 Ibid., p. 777C-D (per Lord Cross).

90 This point is impliedly noted ibid., at pp. 761B (Lord Morris) and 778H (Lord Cross). Needless to say, had there been a floating charge over the relevant assets, its holder would have been repaid in preference to general unsecured creditors. The same point again seems to have been missed by the Court of Appeal in In re Celtic Extraction Ltd. (in Hq.) [2001] Ch. 475, 491, where Morrit L.J. (delivering the Court's judgment), invoked, inter alia, “the very considerable … public policy requirement that the property of insolvents should be divided equally amongst their unsecured creditors”, to uphold the official receiver's ability to disclaim a waste disposal licence as onerous property. The Court's assertion, that any assets preserved by the disclaimer would be distributed pari passu amongst general creditors, is of course without foundation. Any such assets (on the facts, there were none) would mostly go to any floating charge holder and to pre-preferential and preferential creditors.

91 Ibid., p. 780G-H: “[What Air France] are saying here is that the parties to the ‘clearing house’ arrangements by agreeing that simple contract duties are to be satisfied in a particular way have succeeded in ‘contracting out’ of the provisions contained in section 302 for the payment of unsecured debts ‘pari passu’. “Note the unnecessary (and inaccurate) emphasis on “equality” at the end of this quotation: what would have been contracted out of was the whole collective regime, its inequality (e.g. in favour of pre-preferential and preferential creditors) as well as its “equality”.

92 Ibid., p. 780C. The existence of such charges would of course accord priority over BE's general creditors to IATA creditors, as well as granting the latter immunity from the collective liquidation regime.

93 Ibid., pp. 780H-781A: “[It] is to my mind irrelevant that the parties to the ‘clearing house’ arrangements had good business reasons for entering into them and did not direct their minds to the question how the arrangements might be affected by the insolvency of one or more of the parties. Such a ‘contracting out’ must … be contrary to public policy. The question is, in essence, whether what was called … the ‘mini liquidation’ flowing from the clearing house arrangements is to yield to or prevail over the general liquidation. I cannot doubt that on principle the rules of the general liquidation should prevail”. Despite appearances, the objection to granting immunity from the collective regime was not an absolute one. As already noted, the judge had implied earlier in the same paragraph that he would have been content to allow immunity for the IATA creditors by way of security. This also shows the objection was not one of principle. There was no principle involved which laid down, say, that no one can bargain for immunity. The matter was rather of policy. One could only bargain for immunity in an acceptable way (the authority for this is British Eagle itself), and for the right reasons. Even if the method of attaining immunity was acceptable, the reasons might not. In Ex p. Mackay, the only discernible reason for the extra security was the desire of the creditor to better his own position in his debtor's insolvency. Other creditors suffered harm without receiving any compensating benefit.

94 See e.g. [1975] 1 W.L.R. 758, 761F-G, 762D-763C.

95 That was almost certainly the case; it follows that the IATA scheme should have been upheld. Parliament seems to have taken a somewhat similar view; see Companies Act 1989, Part VII, which reversed the effects of the decision with respect to financial markets. The Act creates yet another exception (if the British Eagle decision were to be taken at face value) to the “equality” principle. The recent decision of Neuberger J. in Money Markets International Stockbrokers Ltd. v. London Stock Exchange and Another (Transcript, 10 July 2001), recognises yet another exception to the principle, this time concerning property the ownership of which depends on the personal characteristics of the owner, and further, assets so inextricably linked to such property that they could be considered “ancillary” to it (see e.g. paras. 110-113). In this case, these were, respectively, the membership of the London Stock Exchange, and a “‘B’ share” entitling the holder (roughly) to vote on decisions about how the company which owned the Exchange was to be run, and to participate in the distribution of the value released because of that company's demutualisation.

96 See Goode's misgivings about the decision, Insolvency, pp. 181-182, and those of Oditah, “Assets”, p. 466. For an uncritical invocation of the decision in favour of the “equality” principle, see Finch, “Pari passu”, pp. 198, fn. 28 and 199-200.

97 (1884) 26 Ch.D. 510.

98 See Oditah, “Assets”, p. 464, fn. 36.

99 26 Ch.D 510, 518-519 (per Fry F.J., delivering the Court's judgment).

100 Ibid., p. 519.

101 Ibid., p. 520.

102 Ibid.

103 Ex p. Jay (1880) 14 Ch.D. 19 is a similar case, and is cited by Goode, Principles, p. 151, fn. 39 and Oditah, “Assets”, p. 464, fn. 36, as an application of the “equality” principle. Here, X attempted to vest the title to portions of Y's estate (and not merely the use, as in Ex p. Barter) in herself on Y's bankruptcy. This was struck down, but the reason was (as discussed) the unacceptable attempt to circumvent the operation of the collective regime. With respect, the pari passu rule simply was not relevant to the decision one way or the other.

104 It would be otherwise if the claim were that the liquidation system could not be “orderly” in the appropriate sense to the extent that it diverges from an “equal” distribution. But such a claim would be trivial, and would amount to saying that, to the extent that the system diverges from the pari passu principle, it diverges from the pari passu principle! None of the commentators cited above in support of the principle seem to be taking that position, and all of them seem to accept that the current liquidation regime (despite its less-than-perfect adherence to the pari passu ideal) at least provides a fair degree of order to the process of winding up insolvent estates.

105 National Westminster Bank Ltd. v. Halesowen Presswork Ltd. [1972] A.C. 785, 809A, per Lord Simon; to similar effect but expressed with greater reservation, see the view of Lord Kilbrandon, pp. 822C and 824A. For the proposition that insolvency set-off exists, not to further any such general purpose, but only for the benefit of the party having mutual dealings with the bankrupt, see the sole dissenting speech of Lord Cross, ibid., pp. 812-813.

106 [1993] 1 W.L.R. 1402.

107 At p. 1404G.

108 At p. 1412C.

109 Ibid., mentioning as examples IA, ss. 74(l)(f) (sums payable to a member of the insolvency company) and 215(4) (sums owed to a director who has been held liable for fraudulent or wrongful trading).

110 Ibid., p. 1412E.

111 Ibid.

112 Goode, Insolvency, p. 146, does reach that conclusion. He refers to Natwest v. Halesowen rather than British Eagle, but for the reason discussed in the text immediately below, this is almost certainly an oversight.

113 That the Re Maxwell decision has this effect is noted by Goode, Insolvency, p. 146, fn. 19.

114 See the discussion of this case above.

115 The creditor, National Westminster Bank, would have been deprived by the agreement of its ability to combine two accounts of the insolvent, and to set off the insolvent's liability to it on the overdrawn account against the credit balance in the other. Needless to say, the judicial disapproval of the agreement resulted in the Bank's having priority over the insolvent's other creditors to the extent of the amount set off.

116 For an illustration, see Re Maxwell Pic. [1993] 1 W.L.R. 1402 itself, at p. 1416F-H. It would often be the case that a troubled company can only mount a rescue attempt if some of its existing creditors (EC) create an incentive for outside financiers (new creditors or NC) to lend to the company, by agreeing to subordinate their (EC’s) claims to those of NC, should the debtor company be liquidated. The loss in insolvency value to EC resulting from the subordination agreement is outweighed by the benefit to them of the increased possibility that the company would be able to avoid liquidation altogether with the help of the funds injected into it by NC. See also Re Portbase Clothing Ltd. [1993] Ch. 388. For the reasons given in Goode, Insolvency, pp. 170-171, which are consistent with the analysis in this Section, it is respectfully suggested the Portbase decision is quite unsatisfactory.

117 “Preferential debts”, pp. 93-94, including the references in fn. 78.

118 Ibid., p. 95.

119 See e.g. Finch and Worthington, “Pari passu”, p. 3; Finch, “Pari passu”, p. 194, noting another “traditional justification” of the principle; McCoid, John, “Bankruptcy, preferences, and efficiency: An expression of doubt” (1981) 67 Virginia L.R. 249, 271Google Scholar; Thomas Ward and Jay Shulman, “In defence of the Bankruptcy Code's radical integration of the preference rules affecting commercial financing” (1983) 61 Washington University L.Q. 1, 16. For a rather more nuanced approach which still regards the “equality” principle as the default rule, see Korobkin, “Contractarianism and the normative foundations of bankruptcy law” (1993) 71 Texas L.R. 541, 601-602 and 607-609. See also John Farrar, “Public policy and the pari passu rule” [1980] N.Z.L.J. 100, who mentions the argument that it would be unfair for some creditors to be allowed to contract out of the liquidation regime (not just the “equality” principle), but finds it “questionable”, sometimes even “wide of the mark”; see p. 100.

120 For just two opposing views, see Dworkin, Ronald, Sovereign Virtue: The Theory and Practice of Equality (Harvard University Press, Cambridge, Mass., 2000)Google Scholar, and Raz, Joseph, The Morality of Freedom (Oxford, Clarendon, 1988), Ch. 9Google Scholar. A very useful overview of the issues is found in Gosepath, “Equality”, in Zalta (ed.), The Stanford Encyclopedia of Philosophy, URL = http://plato.stanford.edu/entries/equality/. For the reasons given there (see esp. Section 5) and others, it is submitted that Raz's attack on equality as a distinct political and moral virtue is simply untenable.

121 Dworkin, Virtue, p. 11.

122 Worked out at some length in Mokal, “Authentic Consent”.

123 This point is made by Goode, Insolvency, p. 39.

124 There are some exceptions, most notably the status of secured claims. But even here, insolvency law must consider whether to take account of the pre-insolvency form of the claim for meaningful reasons, not because it fetishizes form. This is touched upon below.

125 We also ignore for the moment the employee-creditors’ rights under the Employment Rights Act 1996. That is discussed in the next Section.

126 For two reasons, this assumption must be treated with the greatest caution. First, it is difficult to sustain coherently and without self-contradiction. And second and despite this seemingly fatal feature, it has been unconsciously accepted and been the cause of many problems in insolvency scholarship. Both these points are touched upon below.

127 Cruikshank, Don, Competition in UK Banking (HMSO, 2000), pp. 149Google Scholar and 155.

128 See e.g. Mokal, “Authentic Consent”, Section 12; and Keay and Walton, “Preferential”, pp. 95 and 99; but see also pp. 100-101.

129 Compare IA, s. 175 (and s. 386), and Sch. 6, which create a priority regime for (inter alia) employee-creditors. This supersedes the “equality” principle enshrined in e.g. IA, s. 107.

130 The question whether ordinary security arrangements are exploitative is left for another day.

131 Except in the charge-back situation, where consistency demands that the party able to assert set-off rights should be given precedence; see Mokal, “Resolving”.

132 For example, see ibid., p. 112, fn. 40 and the accompanying text.

133 There is a vast literature on the subject. See especially Steven Schwarcz, “The easy case for the priority of secured claims in bankruptcy” (1997) 47 Duke L.J. 425; for reasons similar (but not identical) to those he suggests, the priority of secured creditors is beneficial for all the parties collectively. Further discussion is beyond the scope of this paper.

134 See above; see also the discussion in Keay and Walton, “Preferential claims”, who argue against elevating the Crown and employees to preferential status.

135 These factors would be relevant for determining the appropriateness of any method of distribution according to any of a number of theories of fairness.

136 The limits on how much of the sums owed to employees rank as preferential debts can be seen as a more cost-effective way of ensuring that only the most vulnerable would truly benefit from the preferences regime; for details of these limits, see Keay and Walton, “Preferential”, pp. 91-92, including fn. 54. The law of diminishing returns suggests that the more vulnerable the claimant, the more important it would be for him to receive even a smaller sum, and vice versa. The implications of this law seem not to have been noticed by Finch; see “Pari passu”, p. 209.

137 Keay and Walton, “Preferential”, p. 100.

138 For an account, see ibid., which this paragraph draws on.

139 Ibid.

140 For suggestions which seem vaguely similar to the discussion here, see Finch and Worthington, “Pari passu”, pp. 1 and 3; Finch, “Pari passu”, 208-209, acknowledges a type of waste-prevention role for the “equality” principle, but seems to regard this as only one of its many virtues: see e.g. p. 194.

141 See generally Markham Lester, V., Victorian insolvency: Bankruptcy Imprisonment for Debt, and Company Winding-Up in Nineteenth-Century England (Clarendon, Oxford, 1995)Google Scholar, Ch. 1.

142 See e.g. The Case of the Bankrupts (1584) 2 Co. Rep. 25a; 76 E.R. 441, 463-472. Note though that this decision seems partly to be based on the need to prevent a wrongly preferred creditor (and the debtor himself) being able to secure immunity from the collective bankruptcy regime; see pp. 473-474: it would be “a great defect in the law, if, after … he hath utterly discredited himself by becoming a bankrupt, the law should credit him to make distribution of his goods to whom he pleased, being a bankrupt man, and of no credit; but the law … hath appointed certain commissioners, of indifferency and credit, to make the distribution of his goods to every one of his creditors, rate and rate alike …”

143 See the White Paper, Insolvency—A Second Chance (The Stationary Office, 31 July 2001).

144 Ibid., The Rt. Hon. Patricia Hewitt M.P., “Foreword”, and “Corporate Insolvency Proposals”, paras. 2.19, 2.2-2.6, 2.18, and 2.7-2.17.

145 Ibid., para. 2.19.

146 Ibid., “Foreword”.

147 Ibid., para. 2.20.

148 ABRP, Survey, p. 11.

149 This comes from the calculation that, for the Franks-Sussman sample, banks were owed about 40% of total outstanding liabilities when firms entered the “central rescue unit” (see Cycle, p. 8), and, for that sub-set which eventually ended up in the “debt recovery unit” and hence in a formal proceeding, 12% of that debt was paid off while the firm was in the “rescue unit” (Cycle, p. 11).

150 Ibid., p. 13, Table 8, gives the value of collateral as a percentage of bank debt; the figure in the text is an estimated composite.

151 Again, this is a composite figure derived from Franks-Sussman, Cycle, p. 3, and ABRP, Survey, p. 18.

152 Second Chance, Annex D, para. 4.15. This figure is probably over-inclusive, in line with the practice here of resolving doubts in favour of maximising expected additional benefits to unsecured creditors.

153 The figure in the text has been increased to take into account the age of the data currently available, and might be an overestimate; see the National Audit Office Press Notice, “The Department of Trade and Industry Redundancy Payments Service: Management and Recovery of Debt” (17 October 1996); available at URL: http://www.nao.gov.uk/pn/9596695.htm (which mentions a figure of £177m); see also Keay and Walton, “Preferential”, p. 100, including fn. 131.

154 ABRP, Survy, p. 18.

155 Second Chance, Annex D, para. 4.15. Again, note the possible over-inclusivity of this figure.

156 These calculations are subject to the assumption that in deciding on the proportion of floating charge assets to be “ringfenced” for unsecured creditors, the Government will be true to its word that their proposed changes would not adversely affect the interests of secured creditors; Second Chance, para. 2.6.

157 Also ignored is the fact that the abolition of receivership would remove the costs of receiver “opportunism”; see Franks and Sussman, “Resolving financial distress by way of a contract: An empirical study of small UK companies” (22 October, 2000), p. 18; the paper is available at URL: http://www.ifk-cfs.de/papers/franks.pdf. However, these costs are relatively quite small, since they only arise in administrative receiverships, and then only in a proportion of those cases where the receiver's appointor is not fully paid. Their elimination is unlikely to make any noticeable difference to the result.

158 Second Chance, “Corporate Insolvency Proposals”, para. 2.20.

159 This is implied in the “Foreword” to the White Paper; in any case, no other rationale is suggested there.

160 It should be noted the point being made here merely addresses the coherence of the proposal, not its overall desirability.

161 Section 507(d). Many thanks to Look Ho for drawing attention to this.

162 Bridge, “Quistclose”, p. 342.

163 Since Parliament itself (and not just the parties in commercial transactions) has reduced pari passu to the sham that it is.