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Khan, Mohammed Asadulla (2024) The pari passu principle and UK corporate insolvency law. PhD thesis, University of Nottingham.

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Abstract

A company normally goes insolvent when it cannot satisfy the debts it owes. Upon insolvency, the pari passu principle calls for equal and proportionate repayment of debt to creditors based on their pre-insolvency entitlements. This principle is often regarded as a fundamental and central feature of the law.

However, distribution during insolvency does not follow pari passu but rather there is a set hierarchy of priority where certain creditors are repaid before others. As argued by scholars such as Mokal, this thesis maintains that the pari passu principle merely serves as a convenient default rule and fails to make a meaningful impact during insolvency distributions. Accordingly, the ‘pari passu problem’ is presented where the principle is important in theory but insignificant in practice. It is argued that by holding on to the myth of pari passu, developments and improvements to the insolvency distribution system have been unduly restricted.

The thesis features an empirical study that investigates the practical relevance of pari passu during distribution to unsecured creditors. The last similar research was from over 20 years ago. Thus, the thesis provides a much needed updated empirical snapshot of English corporate bankruptcies. The research traces the debt owed and repayments made to creditors in over a thousand insolvencies. This helps assess the incidence of pari passu distribution and highlights room for improvements to the system (e.g., reducing the high costs of proceedings).

The thesis evaluates the theoretical and practical importance of pari passu. In both aspects it is shown that the principle is far less important than claimed. As such, the thesis attempts to address the issues caused by pari passu (e.g., lack of contractual innovation) and proposes reforms in line with free market and the Minimalist-State theory. The suggestions proposed present an alternate method distribution could occur during insolvency. The proposed approach is seen to potentially achieve desirable outcomes such as the increased flow of credit and predictability during proceedings. The proposed suggestions do not seek to reform pari passu but aim to tackle the problems within the insolvency regime (such as the lack of efficiency and transparency during distribution).

The proposed ‘New Approach’ calls for the courts to uphold novel arrangements to encourage contractual creativity. It suggests using technology and a system of registration to enhance the flow of information and enable creditors to contract innovatively. Additionally, it considers how using insurance could protect vulnerable creditors, such as employees, better than the current system. The reforms aim to empower trade creditors to protect their interests and adequately safeguard those considered vulnerable.

Essentially, the thesis theoretically and empirically evaluates the pari passu principle and suggests reforms to the system of distribution. The empirical findings provide much needed clarity on the practicalities of insolvency and underline potential areas for improvements. Further, the suggested proposals (e.g., use of technology, registration, and insurance) highlight an alternate way distribution could occur during insolvency. In particular, the empirical study and the suggestion for reforms are the main contributions to knowledge made by this thesis.

Item Type:	Thesis (University of Nottingham only) (PhD)
Supervisors:	Mevorach, Irit Frisby, Sandra
Keywords:	Insolvency Law, Pari Passu Principle, england, wales
Subjects:	K Law > KD England and Wales
Faculties/Schools:	UK Campuses > Faculty of Social Sciences, Law and Education > School of Law
Item ID:	78036
Depositing User:	Khan, Mohammed
Date Deposited:	22 Jul 2024 04:40
Last Modified:	22 Jul 2024 04:40
URI:	https://eprints.nottingham.ac.uk/id/eprint/78036

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