An Analysis of the Pari Passu Principle in Corporate Insolvency in the United Kingdom

Abstract

Prior to the enactment of the Statute of Bankrupts by the English Parliament in 1542, the legal vacuum created by a complete lack of collective procedures for administrating the insolvent’s assets was somewhat inelegantly filled by applying the principle of “first come first serve”.1 This individualistic regime resulted in both uncertainty and injustice, instituting a societal system of “survival of the fittest” which left “weaker creditors at the mercy of the stronger ones”.2 Under these circumstances, weaker creditors were routinely observed to come away empty-handed, having failed to acquire any of the insolvency assets. Such unjust distribution of assets in corporate insolvency is, however, generally frowned upon in modern societies. For this reason, i.e. in order to remedy these systemic defects, the Statute of Bankrupts introduced a collective apporach into English law with the intention to achieve “equality” in the distribution of an insolvent’s estate.3 Following these reforms, the principle of pari passu was born.4 The Latin phrase pari passu can be literally translated as “on equal footing”, “at the same pace or rate”5 or “pro rata”. The principle anticipates a situation where “all the creditors are treated on equal footing pari passu”6 by ensuring the proportional distribution of all insolvency assets. Underlining the significance of pari passu, the House of Lords stated that “[i]nsolvency law has always sought to balance the need to ensure a pari passu distribution between the creditors.”7 In fact, pari passu is even said to be the “foremost principle in the law of insolvency around the world”.8