670 gathering and distributing the assets

Debts ranked chronologically

A first alternative to pari passu is to provide that debts be repaid from the residual estate with reference to the date of accrual on a first-come-first- served basis. Those with debts established at the earliest dates would, accordingly, be paid first. Such a regime might involve recording and disclosure mechanisms that would allow each creditor to assess the position before entrenching funds.

Such a regime would not, in itself, address the problems of exceptions and bypassing noted above and there might be efficiency costs. As a company entered troubled economic waters it would become progressively more difficult to raise funds since prospective creditors would know that, arriving ‘late’, they would rank low in the distributional order. The effect would be an increasing resort to security, quasi-security and trust devices, and transaction costs would accordingly rise. The newly strong incentive to avoid the estate would, in turn, create increased uncertainty for other prospective unsecured creditors because assessing their lending risks would demand ever more complex and time-consuming analyses of the estate-avoiding measures that have been used in relation to the company. This would involve not only inefficiency but unfairness to the most poorly placed unsecured creditors since the latter would be in no position to evaluate their loan risks.

Debts ranked ethically

It would be possible to pay unsecured creditors according to their, or society’s, needs, so that repayments would be organised on an ethical basis: say, in order to maximise the sum of human happiness.178

Such a utilitarian approach would be vulnerable to the standard criticisms of utilitarianism: how is happiness to be calculated and measured? Whose happiness counts? Does happiness achieved by unethical, even monstrous, means count?179 Even if the tenets of utilitarianism were

178On ethics and insolvency generally see J. Kilpi, The Ethics of Bankruptcy (Routledge, London, 1998). For a utilitarian strategy see P. Shuchman, ‘An Attempt at a “Philosophy of Bankruptcy”’ (1973) 21 UCLA L Rev. 403.

179On the limits of utilitarianism see e.g. A. Sen and B. Williams (eds.), Utilitarianism and Beyond (Cambridge University Press, Cambridge, 1982). On utilitarianism and legal and ethical efficiency issues see R. Posner, ‘Utilitarianism, Economics and Legal Theory’ (1979) 8 Journal of Legal Studies 103; R. M. Dworkin, ‘Is Wealth a Value?’ (1980) 9 Journal of Legal Studies 191; Dworkin, A Matter of Principle (Clarendon Press, Oxford, 1986) ch. 13; V. Finch, ‘The Measures of Insolvency Law’ (1997) 17 OJLS 227 at 239–40; ch. 2 above.

accepted, however, applying such an approach to insolvency would be difficult. There would be high levels of creditor uncertainty since predicting positions in the repayment queue would be nearly impossible (how does one unsecured creditor assess the likely advent of another unsecured creditor who is more worthy or needing of payment?). This would produce huge inefficiencies unless simpler, more predictable, more collectivist distributional rules were employed.180

Ethical approaches to repayment, however, raise general issues of collectivity. If the individual position or worth of a creditor is taken into account in distributing the residual estate then that individual position – whether it is assessed according to utilitarian principles or corrective justice181 or other ethical principles – will be difficult to assess in advance and inefficiencies and unfairnesses would be caused by the inability of creditors to assess present and future risks. This is not to say that certain classes of creditor (for example, consumers, employees or other non-adjusting groups) might not merit special protections on ethical grounds. Reference to such classes in principles of estate distribution would be possible without the uncertainties involved in individual assessments and we see this approach already in the statutory treatment of preferential creditors. Questions arise, however, concerning the defi- nition of such classes; the relative claims of different classes; the wide divergence of claims to deserve protection within the class membership; and the need to translate such ethical approaches into democratically endorsed policy form.

Debts ranked on size

It might be argued that small creditors should be paid at a higher rate of return than those ordinary unsecured creditors who have loaned larger sums to troubled firms. (David Milman has suggested a £750 threshold below which such special treatment should be applicable.)182 The basis

180On rule utilitarianism and artificial virtues see D. Hume, A Treatise of Human Nature, L. Selby-Bigge and P. Nidditch (eds.) (Oxford University Press, Oxford, 1978); Shuchman, ‘An Attempt’, pp. 460–5.

181See Ogus and Rowley, Prepayments and Insolvency, p. 15; R. Epstein, ‘A Theory of Strict Liability’ (1973) 2 Journal of Legal Studies 151; Schwartz, ‘Security Interests and Bankruptcy Priorities’. See also Kilpi, Ethics of Bankruptcy.

182See D. Milman, ‘Priority Rights on Corporate Insolvency’ in A. Clarke (ed.), Current Issues in Insolvency Law (Stevens & Sons, London, 1991) p. 78.