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Take home Exam: Insolvency Law LAWS 6159

2. "The decision in IATA v Ansett Australia Holdings (2008) 82 ALJR 419; [2008] HCA 3 allows contracting parties to ignore the effect of the pari passu rule to the detriment of general creditors". Discuss and examine the reasoning in the case. One of the principle aims of insolvency law is to provide an equal, fair and orderly procedure in handling the affairs of insolvents ensuring that creditors receive an equal and equitable distribution of the assets of the debtor. This is the pari passu (equal sharing) principle, which is generally regarded as being the foremost principle of insolvency law. The rule operates to ensure that creditors of the same priority receive an equal percentage return from the insolvents company’s assets. However, there are often many exceptions to the principle that overcome it such that there are often few assets to be shared, equally or not. Although not in the nature of a secured creditor, a creditor may enter into an arrangement with a debtor company that subsequently goes into liquidation that serves to give that creditor priority rights outside the liquidation. This can apply in clearing house arrangements in certain industries where payments between members of the clearing house are dealt with by mutual set off; in insolvency terms such an arrangement serves to negative the debtor/creditor relationship in respect of the obligations to which the arrangements apply. ‘Ansett collapsed on 12 September 2001 and administrators were appointed. It was then a member of the IATA Clearing House, which pays out airlines for services provided to other airlines in accordance with agreements between IATA and the airlines, including Ansett. International airlines regularly carry passengers and goods on behalf of other airlines. The Clearing House avoids the necessity for the airlines to make and receive numerous payments for such operations. Each month, airlines with a net credit balance receive a payment from the Clearing House while those with a net debit balance are obliged to pay funds into the Clearing House. The agreements between IATA and the airlines provided that settlement of amounts payable would be in accordance with IATA’s Regulations. IATA claimed to be a creditor of Ansett and alleged that Ansett had a net debit balance of $US4,370,989 outstanding as at December 2001.’ The high court in International Air Transport Association v Ansett Australia Holdings Ltd (2008) 82 ALJR 419 rejected an argument that this was contrary to public policy as being against the pari passu principle, as found by the House of Lords in British Eagle International Airlines v Compagnie Nationale Air France [1975] 2 All ER 390; [1975] 1 WLR 758. The house of Lords had decided that the IATA clearing house arrangements were against public policy because they sought to exclude certain property of the insolvent company from the pool available for the distribution to creditors and thereby infringed the pari passu rule. In the particular circumstances in Ansett, which was under a Deed of Company Arrangement, the administrators unsuccessfully claimed credits due to Ansett (but not processed through the clearing house) as at the commencement of the administration, contending hat the deed prevailed over the clearing house agreement. The High Court found that the IATA agreement and regulations applied and Ansett’s rights were not to debts owed to it by other members of the clearing house scheme, but rather the contractual right to receive payment from the IATA if, on clearance, a credit was due to it. Overall, the pari passu principle operates strictly, but it also operates within very confined limits. Apart from the explicit statutory exceptions that have been made, equal treatment of claims applies only among the general body of unsecured creditors. Secured creditors, and others such as those who have retained title to goods supplied to the debtor, are a separate group and are...
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