Were the Cork Committee really trying to subvert pari passu with their comments on preferences?
It has been opined by various commentators (e.g. Finch, McCormack, Prentice, Fletcher) that preference law, such as that promulgated in s.239 of the Insolvency Act 1986, exists for two purposes. First, to help augment the available estate by gathering in assets (and value) which should not have been paid in the pre-insolvency period, and second, to support the long held 'fundamental' principle of pari passu distribution by ensuring fair treatment between creditors, i.e. one creditor should not be preferred in the pre-insolvency period at the expense of the general body of creditors.
Despite some strong critique to the contrary (from Westbrook in 1980 and more recently Mokal in 2001) pari passu is generally held out as an axiom in modern insolvency law. Preference law is therefore seen as a necessary support mechanism in the general scheme of corporate regulation ensuring fairness and equal treatment amongst creditors.
So it is with some surprise that we see rhetoric in the Cork Report (Cmnd 8558) that purportedly sought to undermine pari passu. In Chapter 28 of Sir Kenneth Cork's (pictured) famous report the Committee, which was divided on this issue, opined that in this pre-insolvency environment it was acceptable for diligent creditors to engage in a race to the bottom so as to protect their interest. These precipitous actions should be encouraged. As McCormack has recently noted: “for in its view (Cork) creditors who took active steps to recover what was owed to them should be rewarded by the fruits of their diligence.” (McCormack citing para 1256 of Cork). However, as Finch has more recently opined this, “encourages precipitous actions and it undermines the collective approach to liquidation with all its advantages of efficiency and fairness.” The learned commentator continues, “As critics have suggested... this misses the point since it may well be thought improper to subvert pari passu by preferring one creditor to another in the lead up to insolvency.” (Finch) Were the Cork Committee advocating an approach which undermined pari passu? Should the minority view of the Committee have won the day or were the majority correct with their view of how pre-insolvency creditor action should be rewarded? These questions, tensions and dissent within the Committee certainly make for an interesting area for consideration.
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