Equality without Preference or Priority

Absence of a common worldwide legal framework and global consensus lead to prevalent misinterpretations of the role of property rights rule and pari passu principle which is said to be one of the most significant acts of insolvency laws.

Pari passu principle with the meaning of equality, without preference or priority, in fact has a very little to do with actual equality whereas creditor’s rights do not just deal with his rights against the debtor yet against one another and implies defining which of them possesses the strongest law for any specific relief.

These days however both of these rules are misunderstood, even violated, and therefore creditors are treated differently under them.

One of the highlighted examples is Argentina vs NML Capital case where Argentina breached pari passu principle by subordination of FAA bonds to exchange bonds as well as by lowering their ranking below the exchange ones. Moreover, the plaintiffs’ bonds were lowered in two ways: firstly, when Argentina made payment obligations currently due under plaintiffs’ bonds and secondly, by enacting the Lock Law and its suspension.

The following case is substantial because there are two explanations of the pari passu principle with dramatically varied results therefore the lesson we can learn from this case is that unexpected and wrong elucidation of the clause can lead to consequences that are difficult or even impossible to predict. Moving forward, in general the main reasons of the misinterpretations are different approaches by bankruptcy courts, judges and any other regulatory powers when applying these principles, in particularly the pari passu one.

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The choices include debtor friendly or creditor friendly approach, comparable or non-comparable situations, creditor categorization/ classes (secured or unsecured, pre-preferential etc), order of ranking the debts (chronological or according to their size etc), priority rules. One of the other causes can be the influence of numerous competing parties. Under these alternatives creditors can be treated differently and most often not in their favour or left disadvantaged. Sometimes differences of treatment are lawful, but must be non-reasonable. Sometimes though, there is even discriminatory treatment of various groups of creditors because in most of these contexts equality norm does not play a role it used to have a century ago.

Equality principle is forsworn by insolvency judges who address their attention to other issues and concerns but not equality, whereas in my opinion, both of these rules do matter and pari passu principle could or even should be interpreted similarly as the “sanctity of loan contracts” approach of IMF, WB and informal grouping named as Paris Club which states that ‘once parties duly entered into a contract, they must honour their obligations under that contract’ so as pari passu clause means ‘with equal force’, ‘ranking equally’ – it should refer to equality and nothing else. With that said, recognition of the duty as a general rule can inure as a crucial building element for contemporary insolvency regimes.

However, after all the above mentioned, the following topic leaves me with the question that – with all the possible threats that may arise or could have been previously avoided, maybe it is better to not include this clause in debt instruments at all?