Insolvency |  Mar 06, 2013

The Principle of Pari Passu in Corporate Insolvency.

Abstract

Prior to the winding-up of an insolvent company, its creditors may individually enforce any measure available to them in order to obtain payment of the debt owed to them by such company. However, upon the opening of the winding-up proceedings these individual actions are replaced by a collective insolvency regime which attempts to ensure the rateable and equitable distribution of the assets of the insolvent company among its creditors. This distribution is known as pari passu distribution.

The pari passu principle admits of certain exceptions. These are either entrenched in the law or are provided for in contractual agreements entered between the company in question and its creditors. These exceptions create a situation where certain creditors are paid out the insolvent company’s limited pool of assets prior to the other ordinary creditors are paid through the pari passu system of distribution.

The law also provides creditors with devices which enable them to keep particular assets out of the estate of the insolvent company. These devices give the creditors a right in rem over a particular asset in the possession the insolvent company. They therefore have the effect of subtracting such assets from the grasp of the ordinary creditors as they will not be available for distribution.

The exceptions and creditors’ rights in rem have, in practice, the same net effect of substantially reducing the corpus of assets available for pari passu distribution. Their plurality and the frequency of use may be seen as distorting and diluting the equitable distribution which is attempted to be guaranteed by the pari passu principle. Thus pari passu is exposed to criticism from various authors who regard it as a redundant principle.

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