Priority as Pathology: The Pari Passu Myth

This paper argues that the pari passu principle of insolvency law does not fulfil any of the functions often attributed to it. It does not constitute an accurate description of how the assets of insolvent companies are in fact distributed. It has no role to play in ensuring an orderly winding up of such companies. Nor does it underlie, explain, or justify distinctive features of the formal insolvency regime, notably, its collectivity. The case-law said to support the pari passu principle serves actually to undermine its importance. And the principle has nothing to do with fairness in liquidation. The substantive argument in the paper concludes by examining the actual role of the principle. The arguments made here have important implications for almost every debate about insolvency law, from the status of secured and preferential creditors to the appropriate role of corporate “rescue” procedures.