The excellent work, The Three and a Half Minute Transaction, raises some profound and intriguing questions about the documentation of some of the world’s largest and most important transactions by far and about what lawyers actually do.
This Article raises a supplementary issue by way of an appendage. This issue is whether there ever was a principle of pari passu distribution on bankruptcy, whatever that means. It concludes that equality on bankruptcy in the case of corporations at least is a mere metaphysical illusion and that the reality is rather different.
Bankruptcy law is the profound motivator of commercial and financial law because, if there is not enough brandy and biscuits on the raft, the law is at its most ruthless in having to choose who to pay. We have bankruptcy laws in order to prevent a race to dismember the assets and in order to achieve an equitable distribution amongst creditors. The race to dismember the assets is controlled by stays or freezes—there are potentially at least half a dozen of these, depending on the jurisdiction.
The heart and central core of bankruptcy regimes is the bankruptcy ladder of priorities which determines the hierarchy of claimants on final liquidation. “Even the most cursory examination of bankruptcy internationally shows that the pari passu rule is nowhere honoured. Nowhere is there a flat field.” On the contrary, creditors are paid according to a scale of priorities. There is an intricate series of steps as creditors scramble upwards, gasping for more air to escape the “swirling tides of rising debt [and] to breathe in the squeezed bubble of oxygen at the top.”