The ‘pari passu’ asset distribution mechanism and its practical application within a winding up scenario

Abstract

The 'pari passu' principle was conceived and developed through the centuries to better serve the interests of unsecured creditors in a liquidation process. It was originally intended to ensure the pro rata distribution of assets of a company in liquidation. The principle has stood the test of time because it managed to evolve and is best manifested in the nullification of prejudicial pre-liquidation transactions and in the judicial shielding of companies being wound up. The 'pari passu' principle however is not without its critics mainly because in practice its objectives are very often stultified and rarely achieved. Malta has made great strides along the years to keep abreast with the ever increasing and exacting demands required to preserve and incentivise a thriving corporate business community. At the same time one cannot but help notice that it has lagged behind in the gamut of insolvency law and corporate restructuring. The time is now ripe to follow the lead of other countries such as the United Kingdom and Italy and move towards a holistic approach through the drafting and subsequent implementation of an Insolvency and Bankruptcy Code. For this purpose a number of far-reaching proposals are being put forward in the hope that they would act as a catalyst for reform in the Maltese legislative corporate system. The overall objective is to ensure that Malta be well-equipped and able to face the challenges that lie ahead in the context of a turbulent economic aftermath of the current global pandemic and beyond.