Pari passu: Overview, definition, and example
What is pari passu?
Pari passu is a Latin term that means "on equal footing" or "at the same level." In legal and financial contexts, it refers to situations where two or more parties have equal rights or claims to something. For example, if two creditors are paid pari passu, they will receive equal amounts of payment or treatment without one being preferred over the other.
Why is pari passu important?
Pari passu is important because it ensures fairness in situations where multiple parties are involved, especially in financial agreements or debt repayment. It guarantees that no party is unfairly advantaged or disadvantaged, and all parties are treated equally when it comes to rights or payments.
Understanding pari passu through an example
Imagine a company with two creditors, each owed $1 million. If the company is liquidating its assets and decides to distribute the proceeds to both creditors, a pari passu clause ensures that both creditors will receive an equal share of the proceeds based on their claims. So, if the company has $2 million to distribute, each creditor will receive $1 million.
In another case, if a company issues multiple classes of shares and states that all common shareholders are pari passu, it means each shareholder will have equal rights to dividends and liquidation proceeds, regardless of how many shares they own.
Example of a pari passu clause
Here’s how a pari passu clause might look in a contract:
“All creditors shall be treated pari passu, with each receiving an equal share of any distribution or payment made by the debtor, regardless of the order in which their debts were incurred.”
Conclusion
Pari passu ensures that parties are treated equally, especially in financial matters like debt repayment or asset distribution. It is a key principle for fairness and transparency in business contracts and legal agreements. By understanding how pari passu works, businesses can ensure equitable treatment for all involved parties.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.