News By/Courtesy: Vidisha Gupta | 07 Apr 2020 22:24pm IST

HIGHLIGHTS

  • pari passu rule
  • insolvency and Bankruptcy
  • Companies Act

The application of pari passu  rule in the corporate insolvency and bankruptcy proceedings suggests an equitable distribution of the corporate debtor’s assets to those creditors who stand on the same footing. The origin of pari passu can be traced back to the 16th century when the King of England enacted ‘An Act Against Such Persons As Do Make Bankrupts’. Subsequently, this rule started being adopted by various lawmakers to be incorporated in their laws. Such a step promoted uniformity of the insolvency and bankruptcy laws across the globe and provided it a sense of universalism.The orthodox definition of the principle states that all creditors of a particular type are to be treated similarly post-insolvency, resulting theoretically in them sharing the insolvent’s assets on a pro rata basis yet the orthodox definition is undervalued  by its miscellaneous exceptions, which derive from combination of history, policy and pragmatism . These include preferential and subordinated creditors. A multi-layered definition “reflects a different layer of priority among creditors and that it is a principle according to which ‘creditors of the same class are treated equally and are paid in proportion to their claim out of the assets of the estate” This multi-layered definition of the pari passu principle leads to its mis-application in certain cases.

Under the Constitution of India ‘Bankruptcy & Insolvency’ is mentioned under Entry 9 in List III - Concurrent List i.e. both Centre and State Governments can make laws relating to this subject. Insolvency is a ground of Winding Up and in India the process of winding up of companies is regulated by the Companies Act and is under the supervision of the court. Priority of disposing off the claims is decided by statutes and generally speaking, there are three categories according to their priority; claims with preference, secured claims and unsecured claims.

In the insolvency proceedings, wage claims have priority with that of secured claims in the Indian insolvency laws, shareholders rights are placed under the unsecured creditors and Tax and government interests, however, have been considered in different way. The debts payable shall be paid in full, unless the assets are insufficient to discharge the liabilities, subject to pari passu charge on pro rata basis. Under section 529A of the Companies Act 1956,  the dues to the secured creditors are to be treated pari passu, and have to be treated as prior to all other dues.

 

Sections 326 and 327 of the Companies Act, 2013 lay down the ‘priority waterfall’ at the time of discharge of debts during the liquidation process. The   Liquidation Waterfall is as follows:

  • Costs of IRP (including any interim ?nance raised) and liquidation.
  • Secured creditors and workmen dues (capped up to 24 months from the start of liquidation), pari passu.
  • Employees’ salaries (capped up to 12 months from the start of liquidation)
  • Financial debts of unsecured creditors
  • Central or State Government dues pertaining to 2 year period prior to start of liquidation AND unpaid dues of secured creditors after enforcement of security, pari passu.
  • Any remaining debt.
  • Preference shareholders
  • Equity shareholders

All distributions as per the above waterfall will be net of the liquidator’s fees, which will be deducted proportionately from each stage of the waterfall. In a case, the dues of the workmen was ranked pari passu with the Bank (financial creditor of the company)

At the of claim of debts, if the creditors ask for a preferential treatment, they first have to prove that the pari passu principle does not apply to them. Even though this principle helps in achieving the aims of insolvency law yet it does not have too much application in the real world.  

Section Editor: Pushpit Singh | 08 Apr 2020 0:01am IST


Tags : IBC, Comapnies Act, Pari Passu

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