2- Contracting out of pari passu Flashcards
What is pari passu?
Pari passu is one of the fundamental principles in insolvency law, which requires that all of the debtor’s property be distributed equally in sums according to the debt owed among creditors of the same ranking.
Doesn’t affect secured creditors because they get their secured charge/debt etc.
Re Jeavons, ex p Mackay (1987)- Melish
The principle illustrated.
Case: J sold B a patent in exchange for B paying the royalties to J as they became payable. B later lent J £12,500 in consideration of half of the royalties. It was agreed that should J become bankrupt, the rest of the royalties should be paid to B in satisfaction of the debt.
Decision:
1. This term was void. B only had a lien on half of the royalties which formed his consideration.
- An unsecured creditor cannot stipulate by his contract with the debtor that in the event of bankruptcy he is to get some additional advantage, which prevents property being distributed pari passu.
- Melish- if this was permitted there is no reason why every unsecured creditor would not stipulate that on bankruptcy the price payable under a contract should double.
- BUT the court’s ability to go behind agreements to discover something repugnant to PP is limited to cases where the creditor’s dominant intention is to evade the bankruptcy laws, as it clearly was in this case.
Direct payment clauses- cases?
Re Wilkinson, ex parte Fowler (1905);
Re Johns (1928- Tomlin
Re Mullan & Sons v Ross- updated
Re Wilkinson, ex parte Fowler (1905)
Direct payment clauses in building contracts.
NB: Now due to Mullan this may be wrong, but still apply because it is UK law and Mullan is not.
Case: B contracted by PA to carry out works. B sub-contracted a firm to provide machinery.
A term of the main contract was that if the engineer had a reasonable belief that B was unduly delaying proper payment to SC for the machinery, he could order direct payment for it from PA.
B becomes banrkrupt. Engineer makes an order that PA should pay SC the £836 which B owed the SC out of the £1,575 that PA owes B.
Trustee argues this is a breach of pari passu as it would take away the £836 from B’s unsecured creditors and give the advantage of it to SC who would not have to proof/would receive the full amount.
Decision:
1. Clause is valid- policy
While the clause is to the advantage of the SC it is also to the advantage of PA. PA’s need to keep contractors satisfied that payment will be received for confidence in future dealings. This is not therefore an advantage unduly given to SC in breach of the PP for this policy reason.
• May only apply to PAs or to analogous situations.
- Engineer acted within his power under the clause
(A) Reasonable belief that B was unduly delaying payment- B became bankrupt of his own petition so this constituted unduly delaying payment.
(B) Timing- Would have been competent for engineer to file the order on the bankruptcy.
- He waited until after the trustee had attained title.
- BUT the power arose properly and was never revoked so this is irrelevant. The order is good. - SO the terms bind the trustee as they would have bound the bankrupt had he never become bankrupt.
Re Johns (1928)- Tomlin
direct payment clauses in mortgages.
Case: Mother and Son agree to mortgage S’s reversionary interest in his Father’s will in return for a £1,650 loan from her to him.
BUT a term stipulates that if he becomes bankrupt, along with the reversionary interest (the consideration), M will be also entitled to the return of the £1,650, plus interest, from his trustee. He has poor finances at the time so it is likely that he will become bankrupt.
BUT if she dies the term stipulates that £650 can be paid in satisfaction of the debt.
Trustee argues this is void for breach of PP.
Decision:
1. A provision which stipulates that a mortgagee is to obtain some advantage she would not obtain but for the mortgage it is a fraud on PP.
- Tomlin- It is reasonably plan that this is a deliberate device to obtain something more on bankruptcy than would otherwise be available. It would prejudice the general body of creditors. She is entitled only to the mortgaged property.
Minimum payment clauses in HP agreements- case?
Re Apex Supply (1942) Simmons and Gibson
Re Apex Supply (1942) Simmons and Gibson
Minimum payment clauses in HP agreements.
Case: 2 cos in HP agreement. A clause stipulated that if the hiring co went into liquidation within 9 months of the agreement, or a number if other circumstances arose, the owner should retake possession of the goods and the hirer should pay a sum which, along with instalments previously paid should together total £1,020 for compensation for the depreciation of the goods.
Liquidators refused to accept the owner co’s proof for this sum.
Decision: Gibson
1. Where a HP agreement contains a clause that a hirer is to pay compensation for multiple acts of his default, one of them being liquidation, it would be extravagant to suggest that the clause was dominantly intended defeat PP distribution (as was required by Jeavons, but may not be required anymore)
- Minimum payment clauses in HP agreements exist to compensate the HP co for the depreciation of the goods, not to give them an extra advantage over other creditors of the same ranking.
So it can be distinguished from the cases where the creditor has a charge over a loan but claims something more in the event of bankruptcy (Jeavons, Johns), which are a breach of PP.
Extension of the principle in Jeavons- cases?
British Eagle v National Air France (1975) HOL;
Re Mullan and Sons v Ross (1996) NI CoA;
IATA rule revision- 9(a);
International Air Transport Association v Ansett Aus Holdings (2008) HC of Aus
British Eagle v National Air France (1975) HOL
Extension of the principle beyond Jeavons.
IATA Rule 18(b)- it is an express term of a contract between 2 members that any mutual debit or credit should be handled through the medium of the clearing house.
Case: BE went into liquidation when AF owed it £5K, but BE owed other airlines £50K, so according to clearing house regulations could not claim the money until it paid the money it owed.
1. Rule 18(b) is void in this case as a breach of PP- it would secure AF the advantage of not having to proof for the money and keeping the full amount.
- It did not matter that there were sound business reasons for the use of the clearing house through 18(b). It was not necessary (adverse to Jeavons) that the dominant intention of the creditors be to commit a fraud on the insolvency framework.
- BE could therefore claim the £5K directly from AF, and the rest of the airlines would have to proof for what was owed to them in the liquidation.
- The clearing house airlines were not secured creditors by virtue of the clearing house system. It is merely a contractual document which resolves mutual indebtedness, it does not create a charge over those monies.
Re Mullan and Sons v Ross (1996) NI CoA
Applying the extended principle to direct payment clauses.
Case: sub-contractor had done work for main contractor to the value of £114K, which was substantially done when the main contractor went into receivership. A direct payment clause in the JTC Standard Contracting Terms 1981 had been included in the contract.
Decision: Kerr
- Pari passu is the most fundamental principle in insolvency law. This is what the decision in British Eagle illustrates, meaning there is no need for the dominant intention of the creditor by the clause to be to commit fraud on the insolvency legislation.
- The money was therefore the property of the main contractor, and it would be distributed PP. The sub-contractor would have to prove in the liquidation as an unsecured creditor.
- Wilkinson, e p Fowler had been wrongly decided (though may still apply to PAs, and this is not an English case).
- BUT it would be interesting to hear the views of an English court on the position of direct payment clauses after British Eagle. There is need for full consideration of the authorities and a judicial statement.
IATA rule revision- 9(a)
For transactions between members of the clearing house no liability for payment and no right to recover payment shall accrue. Instead, members shall have liabilities to the clearing house for balances due by them.
International Air Transport Association v Ansett Aus Holdings (2008) HC of Aus
Similar facts to other airline cases.
- IATA is the creditor and can assert a claim in liquidation.
- The airline in liquidation has a right to receive any credit balance arising as a result of the monthly set off from IATA.
- No debtor/credit relationship arises between the airlines, so there can be no proofing of claims.
- The IATA rule is not repugnant to PP.
Impact of Ansett?
- Provides clarity to the international aviation community on how CH obligations operate.
- Likely to be used as guidance in other cases.
So- current position of cases?
Old position=
Jeavons, Wilkinson, Johns.
Stays same= Apex supply.
New position= British Eagle (takes over Jeavons); Mullan & Sons (takes over Wilkinson), Ansett
