Pari Passu Distribution and Post-Petition Disposition: A Rationalisation of Re Tain Construction
14 Pages Posted: 22 Nov 2005
Date Written: November 21, 2005
The UK Insolvency Act 1986, s 127 provides that in a winding up by the court any disposition of the company's property made after the commencement of the winding up is void unless the court otherwise orders. The court recently held in Re Tain Construction that the policy of s 127 is to prevent the circumvention of the pari passu distribution of assets which is at the foundation of insolvency law. Accordingly, in deciding whether to validate a transaction, the court must have regard to this policy. Furthermore, a s 127 claim is susceptible to the change of position defence. While the substantive decision is correct, its reasoning is highly unfortunate and misguided almost on all counts.
As illustrated by the reasoning in Re Tain Construction, there is a total lack of understanding of the basis of the s 127 regime in particular and the pari passu principle in general. It does not help that writers persist in pursuing the victory of pari passu through capitulation, and in Re Tain Construction the court's insistence on the relevance of the pari passu principle is flatly contradicted by the facts of the case.
It is submitted that the s 127 regime performs three functions, none of which has anything to do with the pari passu principle: preservation of the insolvent estate, sustaining the order of priority of insolvency distribution, and enabling the debtor to proceed with its business during the gap period between the presentation of the winding up petition and the making of winding up order. In other words, it perfects the regimes of preference and transactions at an undervalue, while at the same time ensuring that the debtor's business is not paralysed by the filing of a winding up petition.
While the right of recovery under s 127 is restitutionary, the reason for restitution is policy-based. This policy motivated restitution may only be overridden through the validation machinery. The general defence of change of position has no place in this regard.
Keywords: disposition of property after winding-up petition, pari passu principle, restitution, change of position
JEL Classification: K11, K12, K39
Suggested Citation: Suggested Citation