Pari passu

Pari passu is a Latin term meaning “equal footing” and is used in finance and law to indicate that multiple parties, claims, or securities share the same rank and rights without any preference over each other.
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Updated: Jun 27, 2024

3 key takeaways:

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  • Pari passu denotes that obligations, claims, or securities are treated equally and without preference in the event of distribution or liquidation.
  • It is commonly used in bankruptcy proceedings to ensure that creditors of the same class receive proportional repayments.
  • The term is also applied in bond covenants and loan agreements to stipulate that all parties involved have equal ranking and priority.

What does pari passu mean?

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Pari passu, meaning “equal footing” in Latin, is a legal and financial term used to describe a situation where multiple parties or claims are treated equally and without preference. In practice, this means that in the event of a distribution of assets or liquidation, each party will receive an equal proportion of their claim relative to others in the same category. Pari passu ensures fairness and equality among similar claims or securities.

For example, if two creditors hold pari passu claims against a bankrupt company, they will receive equal treatment in the distribution of the company’s assets, proportionate to their claims.

Applications of pari passu

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  • Bankruptcy proceedings: In bankruptcy, pari passu ensures that creditors within the same class receive equal treatment and proportional repayments based on their claims.
  • Bond covenants: Bonds issued with a pari passu clause guarantee that all bondholders have equal rights and claims on the issuer’s assets, without any bondholder having priority over others.
  • Loan agreements: Pari passu clauses in loan agreements ensure that the lender’s claims rank equally with other unsecured creditors and do not have subordinate status.

For instance, in the liquidation of a company, unsecured creditors with pari passu claims will share the remaining assets equally after secured creditors have been paid.

Importance of pari passu

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  • Fairness: Pari passu ensures equitable treatment among creditors or investors, preventing preferential treatment and promoting fairness in financial transactions.
  • Risk management: By guaranteeing equal ranking, pari passu clauses help manage risk for creditors and investors, providing assurance that their claims will not be subordinated to others.
  • Legal clarity: The use of pari passu provides clear legal guidelines for the distribution of assets, reducing disputes and uncertainties in bankruptcy and insolvency cases.

For example, in a corporate bond issuance, a pari passu clause assures all bondholders that they will be treated equally, reducing the risk of one group of bondholders being prioritized over another.

Challenges and considerations

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  • Interpretation: The interpretation of pari passu clauses can sometimes be complex, especially in cross-border financial transactions where different jurisdictions may have varying legal frameworks.
  • Enforcement: Ensuring pari passu treatment requires careful legal and financial structuring to enforce the equal ranking of claims in practice.
  • Conflicts: In cases where multiple classes of creditors are involved, distinguishing between different classes and ensuring pari passu treatment within each class can be challenging.

For instance, in a multinational bankruptcy case, ensuring that pari passu clauses are honored across different legal systems may require detailed legal coordination and expertise.

Examples of pari passu in practice

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  • Corporate bonds: A corporation issues bonds with a pari passu clause, ensuring that all bondholders have equal priority in claims on the company’s assets.
  • Syndicated loans: In a syndicated loan agreement, pari passu clauses ensure that all lenders in the syndicate have equal ranking and share in repayments proportionally.
  • Bankruptcy distributions: In a bankruptcy case, unsecured creditors are treated on a pari passu basis, meaning they receive equal treatment in the distribution of the debtor’s remaining assets.

For example, if a company goes bankrupt and has $1 million to distribute among $10 million of unsecured claims, each creditor with a pari passu claim would receive 10% of their claim.

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  • Bankruptcy law
  • Bond covenants
  • Loan agreements
  • Creditor hierarchy
  • Insolvency proceedings

Understanding these related topics can provide a deeper insight into the applications and implications of pari passu, highlighting its significance in ensuring equitable treatment in financial and legal contexts.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.