Pari Passu Lost and Found: The Origins of Sovereign Bankruptcy 1798-1873

Marc Flandreau
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Marc Flandreau: University of Pennsylvania

No inetwp186, Working Papers Series from Institute for New Economic Thinking

Abstract: Verdicts returned by modern courts of justice in the context of sovereign debt lawsuits have upheld a ratable (proportional) interpretation of so-called "pari passu" clauses in debt contracts which, literally, promise creditors they will be dealt with equitably. Such verdicts have given individual creditors the right to interfere with payments to others, in situation where the sovereign had failed to make proportional payments. Contract originalists argue that this interpretation of pari passu clauses has no historical foundation. Historically, they claim, pari passu clauses never granted individual creditors a unilateral right to block payments to other bondholders assenting to a government debt restructuring proposal. This article shows this claim is incorrect. Drawing on novel archival research, it argues that pari passu clauses find one potent historical origin in the operation of a now forgotten sovereign bankruptcy tribunal, the London stock exchange. Under the law of the stock exchange, departure from ratable payments did create a unilateral right for individual creditors to interfere with sovereign debt discharges. In fact, ratable distributions provided the touchstone for the stock exchange sanctioned sovereign debt discharge system. What is more, sophisticated contract drafters availed themselves of the logic. The result was a weaponization of pari passu clauses, and their inscription into sovereign debt covenants in the 19th century. The article concludes that the modern debate on the role of clauses in sovereign debt contracts cannot be held without thorough reconsideration of the history of sovereign bankruptcy.

Keywords: Sovereign debt; pari passu clauses; London stock exchange laws; history of sovereign bankruptcy. (search for similar items in EconPapers)
JEL-codes: N20 N23 N24 N43 N44 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2022-06-03
New Economics Papers: this item is included in nep-his and nep-hpe
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Persistent link: https://EconPapers.repec.org/RePEc:thk:wpaper:inetwp186

DOI: 10.36687/inetwp186

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