213 or 214 of the Insolvency Act 1986] in relation to a person who is a creditor of the company, it may direct the whole or any part of any debt owed by the company to that person and any interest thereon shall rank in priority after all other debts owed by the company and after interest on those debts’. Similarly the Insolvency Act 1986 defers sums due to members of the company by way of dividends, profits or otherwise. Such claims are ranked below those of all other creditors.107 It is clear, however, from the case of Soden108 that the relevant section (section 74(2)(f)) subordinates to the rights of unsecured creditors only sums due to a member ‘in his character as member’. This covers sums due under the (then) section 14 (Companies Act 1985) statutory contract which draws a contract out of the terms of the company’s memorandum and articles and other obligations imposed by the Companies Act.109 Sums due to a member independently of that (now) section 33 (Companies Act 2006) membership contract are excluded as, for example, are sums due as court awards in an action for misrepresentation, as in the Soden decision itself. Such sums owed would not be deferred but would rank pari passu with unsecured creditors. The broader importance of the Soden decision is the approach it lays down concerning the ranking of claims of members whose financial relationship with their company goes beyond simply share ownership. Issues of set-off are also affected since Soden holds that sums arising out of the statutory membership contract will provide no set-off from, say, non-fully-paid-up shares, but other independent claims outside the statutory contract may be set-off against the obligation of contribution.

Conclusions: rethinking exceptions to pari passu

The following chapter considers whether pari passu, in its strong sense, is so frequently bypassed and flawed in shape and application that it is appropriate to look to alternative approaches to distribution. Here, however, it is necessary to consider whether the current exceptions to pari passu are in need of reform. Thus far the case for abolishing Crown preferences has been accepted and it has been indicated that there may be reasons for revising the rules on set-off.

107Insolvency Act 1986 s. 74(2)(f).

108Soden v. British & Commonwealth Holdings plc (in administration) [1997] BCC 952.

109See now Companies Act 2006 s. 33: on which see Boyle and Birds’ Company Law, pp. 145–52.

626 gathering and distributing the assets

Are there, however, other classes of unsecured creditor that are in need of greater or lesser protection than at present? In the case of one group put forward for greater priority – that of consumer creditors – we have seen difficulties with the argument for favourable treatment. The problem with this proposal is that it is difficult to distinguish ‘consumer’ from ‘trade’ creditors since there will be similarity between many of the contractual and practical arrangements entered into by such parties. Many trade creditors, moreover, may not have been repeat players in their dealings with the insolvent company yet many consumer creditors may have sustained a continuing relationship. We have seen that, compared with employees, the case for protecting the consumer creditor may be weak since the consumer is likely to enjoy a greater freedom to contract or decline to contract with the company; is more able to exit from the relationship in favour of forming a connection with another company; is more likely to spread risks by relying on more than one company to supply its required consumer goods; and is accordingly a lower-cost risk bearer than the typical employee.

A further proposal is designed to protect those creditors who have acted in a manner that benefits their fellow creditors. Prentice has argued that where creditor A takes action through the courts to enforce a debt but that action is overtaken by a winding-up order,110 the court should have a discretion to award creditor A the costs of the litigation but not the benefit of any judgment.111 Awarding such costs to such creditors would give priority to those costs and would compensate creditor A for the expenses of an action that is likely to benefit other creditors by signalling to them that the debtor company’s viability may be at issue. The court’s discretion, the argument runs, could be used to keep the floodgates closed on precipitate actions to enforce debts and this would discourage enforcement races. The award of such court costs would also prevent debtor companies from prevaricating when asked to settle accounts while using the threat of a voluntary winding up to discourage creditors from pressing their claims: the threat would be empty if the creditor would be liable to recover costs. This might, in turn, prevent unnecessary liquidations. Finally, the principle of pari passu would be respected by limiting the effective priority being given to the costs of the action only.

A difficulty with the proposal is that, as we have seen in chapter 3, signalling is a flawed process. When creditor A seeks to enforce a debt

110Thereby staying the enforcement of all actions: see further ch. 13 above.

111See D. Prentice, ‘The Effect of Insolvency on Pre-liquidation Transactions’ in B. Pettet (ed.), Company Law in Change (Stevens & Sons, London, 1987).

against company B in court, this may be the product of A’s lack of information and panicky state of mind rather than any process of rational evaluation of B’s viability. There may, moreover, be reasons for A’s seeking to enforce a debt at a particular time that are entirely unrelated to B’s viability: the state of A’s own financial affairs (or internal corporate politics) may be the driving factor behind the legal action. It could be responded that the envisaged judicial discretion regarding costs might be employed in a manner that rewards only actions offering good signalling to other creditors but this is to presuppose unrealistic levels of information in the hands of the judiciary. The extent of a discretion to award costs, rather than a right to costs, might be said also to undermine any incentives that creditors might have to bring actions and send signals to other creditors. The state of the present law does allow creditors other than creditor A to nullify the benefits of any judgment obtained by A: the other creditors can simply await A’s judgment and then present a winding-up petition. It could be argued, however, that creditor A did have the option of presenting a winding-up petition himor herself and that accordingly he/she has no basis for complaint. This argument holds except that the courts will not allow a creditor to use a winding-up procedure to collect small debts.112 Overall, the case for the proposed discretion to award litigation costs to A seems not to be made out. It is based on assumptions about signalling that are difficult to sustain and it would create, at least to a degree, an incentive to litigate that is liable to render the overall costs of winding up a company higher than would otherwise be the case.

To conclude, it should be emphasised that, in considering exceptions to pari passu, it is the relative cases for preferring the different types of creditor that are at issue. In the above discussion, the group for whom the strongest case for a protected status can be sustained is that of company employees and the criteria relevant to an assessment of that case included: ability to gain and use information concerning default risks; ability to adjust terms to take on board such risks; capacity to exit from excessively risk-laden arrangements; vulnerability to risks; and status as a lowor high-cost bearer of risks. Employees are protected in employment protection legislation but it is questionable whether the Crown should still enjoy the statutory preferential status of employees’ debts through subrogation now that the Crown’s own preferential status has been abolished.

112I.e. under £750: see Insolvency Act 1986 s. 123(1)(a), though creditors may combine their debts to qualify: Re Leyton & Walthamstow Cycle Co. [1901] WN 275; see ch. 13 above.