Pari passu: Overview, definition, and example
What is pari passu?
Pari passu is a Latin term meaning “on equal footing.” In contracts, it ensures that certain obligations, rights, or claims are treated equally without any preference or priority over others. This is commonly used in financial agreements to indicate that multiple creditors or shareholders have the same rank when it comes to repayments or distributions.
Why is pari passu important?
Pari passu is important because it guarantees fairness among parties with similar claims. In finance, it ensures that all creditors in the same category are repaid proportionally without favoritism. For businesses, this prevents disputes over priority and ensures equal treatment in loan agreements, bonds, and insolvency cases.
Without a pari passu clause, some creditors or shareholders might argue for preferential treatment, which could lead to legal complications and financial uncertainty.
Understanding pari passu through an example
Imagine a company issues bonds to multiple investors. The bond agreement states that all bondholders will be repaid pari passu. This means that if the company faces financial trouble and can only repay part of the debt, all bondholders will receive the same percentage of repayment—none will be paid in full while others get nothing.
Similarly, if two lenders provide a company with equal-ranking loans under a pari passu clause, they must be repaid proportionally. If the company can only repay 50% of its debt, both lenders will receive half of what they are owed rather than one getting paid in full first.
An example of a pari passu clause
Here’s how a pari passu clause might appear in a contract:
“The obligations of the Borrower under this Agreement shall rank pari passu with all other unsecured and unsubordinated obligations of the Borrower.”
Conclusion
A pari passu clause ensures that parties with similar claims are treated equally, preventing any one party from gaining an unfair advantage. This is particularly useful in finance and loan agreements, where it guarantees that creditors or investors receive equal treatment in case of repayment or insolvency.
For businesses and lenders, understanding pari passu is essential to ensuring fairness and avoiding unexpected financial risks.
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.