The literal meaning of pari-passu is “equal footing”. It is a Latin phrase depicting situations in which the management of 2 or more creditors, assets, obligations or securities is done without preferring anyone over the other. For instance, throughout bankruptcy proceedings, the situation of Pari-passu occurs. When a verdict is reached by the court, it equally treats all creditors. The trustee is liable to repay the fractional amount to them, the same as other creditors.
A Little More on What is Pari-passu
Pari-passu is a financial term referring to bonds, credits or classes of shares having equal payment rights or seniority. Moreover, secondary shares issuance having equal rights with the present shares ranks pari-passu. Trusts and wills can assign a distribution of in pari-passu, in which all of the named entities equally share the assets.
Pari-passu can depict an example where 2 or more than 2 items can claim the same rights as the other. All new shares in an offering in the marketplace have equal rights like those issued in a previous offering. In such a case, we call the shares as pari-passu.
Mostly, similar items are pari-passu, having equal costs and benefits of the other grouped items. In other cases, items are only pari-passu in 1 or just specific aspects, such as 2 competitors offer 2 functionally similar widgets for the same amount with profound differences, e.g. with respect to colour. Functionally, these widgets are pari-passu but aesthetically, they might differ.
Pari-passu may depict particular clauses within a number of financial vehicles, for example, bonds and debts. Mostly, these clauses make sure that the attached financial product is performing functions the same as others. Since it is related to the loan, these are mostly in place while handling unsecured obligations.
Secured and Unsecured Debts
Because secured loans are backed by an asset, they are mostly not completely the same as other obligations the lender holds. As no asset is there to support unsecured loans, there are more cases of bankruptcy or lender default. In addition, an unsecured financing provider may order clauses that stop a lender from participating in specific activities, e.g. assets promising for another loan to maintain a position regarding repayment.
References for Pari Passu
Academic Research on Pari Passu
• The pari passu clause in sovereign debt instruments, Buchheit, L. C., & Pam, J. S. (2004). Emory LJ, 53, 869. The pari passu clause is for the equal rights of all the lenders. So, the borrower should be protected from any kind of risk supporting other creditors. It cannot happen in the United States without the consent of the borrower. In 2000, a judgement creditor advanced a new interpretation of this clause in terms of ratable payment. If this is correct, it can fairly change international financing. The authors state that ratable payment is a misconception.
• Pari Passu and a Distressed Sovereign’s Rational Choices, Bratton, W. W. (2004). EMORy lJ, 53, 823. This article explains the role of pari passu clause for the sovereign debtors, economic incentives in case of closed loans and bond contracts. Ex-ante reading is conducted when the case is being executed while the ex-post reading is conducted at the time of distress. The findings of this paper are that ex-post reading can be linked legitimately to the clause. It is accurate all the time under all circumstances.
• Origin Myths, Contracts, and the Hunt for Pari Passu, Weidemaier, M., Scott, R., & Gulati, M. (2013). Law & Social Inquiry, 38(1), 72-105. The authors interviewed corporate lawyers to explore sovereign bond lending. They observe 2 mixed aspects of myths, the lawyers suppose about the vogue terms of the contract. 1st, they prove that myths are wrong. 2ndly, they are mostly unflattering. This research seeks why the contracts myths hold an appeal for the elite segment.
• The pari passu clause sub specie aeternitatis, Buchheit, L. C. (1991). Int’l Fin. L. Rev., 10, 11. In this study, the author examines the pari passu clause from a universal perspective. It is useful in some cases but not necessarily correct in many aspects. Some cases of history do not favour this clause.
• The pari passu clause in sovereign debt instruments: developments in recent litigation, Olivares-Caminal, R. (2013). This article was proposed on legal aspects at the panel session on sovereign default. The BIS (Bank of International Settlements) hosted a seminar in January 2013 on sovereign risk.
• The Pari Passu clause in sovereign bond contracts: Evolution or intelligent design, Wright, M. L. (2011). Hofstra L. Rev., 40, 103. This paper explains the clause of pari passu related to sovereign bond agreements. The authors provide detailed information on its intelligent design and evolution.
• Rank Pari Passu or Not to Rank Pari Passu: That Is the Question in Sovereign Bonds after the Latest Episode of the Argentine Saga, Olivares-Caminal, R. (2009). Law & Bus. Rev. Am., 15, 745. This research was carried out to investigate whether we should rank pari passu or not. After the most recent Argentine Saga episode, this query was raised in sovereign bonds.
• Understanding the pari passu clause in sovereign debt instruments: a complex quest, Olivares-Caminal, R. (2009). The International Lawyer, 1217-1236. The clause of pari passu has shifted to unsecured lending from secured lending. There are specific jurisdictions that permit a debtor to use preference. Wrong interpretation in the Elliot case has also made it incorrect. Thus, the clause became unsecured. This paper presents arguments that pari passu is not required in the unsecured lending Other than the exceptional cases.
• Sovereign debt documentation: Unraveling the Pari Passu mystery, Varottil, U. (2008). DePaul Bus. & Comm. LJ, 7, 119. There is a conflict in the contributing creditors and holdout creditors. The Belgian court has worsened the case using the standard clause of pari passu. The clause has still not changed. Using the statistical evidence and the boilerplate terms, the authors investigate why sovereign debt contract has not been altered though it has reducing nature. They describe the endogenous and exogenous reasons. They monitor these terms in depth.
• From the Pari Passu Discussion to the ‘Illegality’of Making Payments, Chodos, S. (2016). Too Little, Too Late: The Quest to Resolve Sovereign Debt Crises, 77. This study makes discussion on pari passu and its move to the unlawfulness of making payments.
• Sovereign pari passu and the litigators of the lost cause, Cotterill, J. (2013). Capital Markets Law Journal, 9(1), 18-25. There is a wider discussion on recalcitrant (unmanageable trait) sovereign lenders and courts equity powers in the cases of bond agreements. This paper contains several queries and research on the satisfactory answers, e.g. does cause of pari passu really worth it. Though it has got success apparently, the legal proceedings prolong. Can it be beneficial for the post judgement lenders to sue everybody? Is fixing of saga merely redrafting of the clause?