chapter’s discussion of preference for consumer creditors and, to recap, it could be said that many trade creditors are far more harshly affected by corporate insolvencies than the average consumer creditor: their livelihood may depend on payment, and some trade creditors may be less able to evaluate risks, adjust terms or insure against bad debts than some consumers. On such questions of creditor vulnerability much turns, again, on such matters as the type of transaction involved, the pattern of risk spreading, the mode of payment, the market traditions, the levels of competition in the sector, the quality of information on suppliers that is available and the rate of turnover of business in the sector. If one is really concerned with fairness, it could be said, attention should be paid not to consumers as a class but to protections for individual creditors who are ill-positioned to evaluate risks or sustain economic shocks. Here, though, proponents of change are in a difficult position. It is difficult to make a general class claim, and to take on board individual circumstances introduces the uncertainties and inefficiencies noted above in relation to ethical approaches.

Conclusions

Any discussion of pari passu has to bear in mind the link between issues of residual estate distribution and issues of estate construction as a whole. The import of the above discussion is that if fairness and efficiency are sought in the distribution of the residual estate, the case for a generally collective approach is a strong one. To take on board individual positions, vulnerabilities or ethical merits produces too great an accumulation of uncertainties and transaction costs to provide either fair or efficient processes.

It has also been argued above, however, that concerns for the fair and efficient treatment of creditors may be served by looking beyond questions of residue distribution. A blinkered focus on pari passu should, accordingly, be avoided. Not only is it relevant to look to questions of estate construction more generally but attention should also be paid to protections for ‘vulnerable’ risk bearers in the form of procedural requirements (of information provision and disclosure); to substantive protections of a general nature (such as a ‘prescribed part’ fund for ordinary unsecured creditors); to ways of reducing overall risks of insolvency (for example, by improvements in managerial standards and training); and to modes of lowering risks to the vulnerable by spreading insolvency risks. This spreading can be achieved, for instance, by

674 gathering and distributing the assets

extending risks across corporate groups; by establishing compensation regimes and by relying on (or instituting and requiring) insurance provision.

Pari passu plays a role in insolvency proceedings but this role is limited by the context described above. Improvements in the legal regime are possible, however. Exceptions and bypasses could be clarified and steps could be designed to limit the extent to which poorly placed creditors bear undue risks because of their inability to adjust terms in the light of assessable risks. One general improvement could be the infusion of greater transparency and more readily available information into insolvency processes (for example, by disclosure rules on ROT clauses). There seems no strong case, however, for major new allocations of preferential status.185 As for the contention that pari passu is not the best way to distribute the residual estate, those alternatives to pari passu that are based on assessments of the individual position or the merit of the creditor would be objectionable, as noted, on grounds of uncertainty, inefficiency and unfairness. Those based on new approaches to the definition of classes face problems of heterogeneity in class membership and of demonstrating why classes selected for new special rates of repayment have claims that are generally stronger than competing classes.

185A minor new allocation might be claimants seeking restitution of unjust enrichments: see V. Finch and S. Worthington, ‘The Pari Passu Principle and Ranking Restitutionary Claims’ in Rose, Restitution and Insolvency.