Definition
Pari passu is a Latin term that in finance refers to an arrangement or agreement that treats all parties equitably. When assets are distributed pari passu, each party receives their share proportionally, no one is given preference. In terms of securities, securities issued pari passu have the same rights to assets or earnings.
Key Takeaways
- Pari Passu is a Latin term that means “equal footing”. It refers to situations where two or more assets, securities, creditors or obligations are equally managed without any display of preference.
- An example of Pari Passu can be seen in the issuing of ordinary shares by a company. Each share carries equal rights and would receive an equal amount in dividends. Therefore, all ordinary shareholders are on a ‘Pari Passu’ footing.
- In the context of loan agreements, Pari Passu means that the lender is assuring the borrower that it will not do anything to undermine the borrower’s loan or intervene in the borrower’s business in favor of another party. There’s an expectation that all lenders will be treated the same.
Importance
Pari Passu is a critical finance term due to its implications in loans, bond issues, and bankruptcy proceedings.
Notably, Pari Passu, a Latin term meaning “equal footing,” ensures fair treatment among creditors or securities holders.
Lenders or creditors who have Pari Passu status share the assets equitably in the event of a borrower’s default, preventing any single creditor from gaining an unfair advantage over the others.
This principle is fundamental to maintaining a balanced financial system, encouraging creditors to lend or invest in businesses knowing that their interests are equally protected alongside other counterparties in the same class.
Explanation
Pari passu, a Latin phrase meaning “equal footing,” presents a critical concept in finance dealing with the fair treatment of all parties involved in a particular transaction, ensuring that no party receives preferential treatment over another. In terms of credit ranking or asset distribution, it stipulates that all creditors or investors should be on an equal footing, and one should neither be disadvantaged nor get an advantage over the others.
Therefore, the main purpose of pari passu is to maintain equality and prevent any sort of favoritism during financial processes. The application of pari passu can be seen prominently in various financial aspects such as bankruptcy proceedings, bond issuances, loan agreements, and similar transactions.
For instance, in the event of a company’s bankruptcy or liquidation, the principle of pari passu applies ensuring all creditors receive their proportionate share of the assets, without any one creditor enjoying priority over another. Similarly, in bond issues, pari passu ensures that all the bondholders get equal treatment in terms of interest payments and principal repayments.
Thus, it embodies the essence of fairness and equitability in matters of finance.
Examples of Pari Passu
Syndicated Loans: Often in business finance, when a large loan is too risky for a single lender, it gets syndicated or divided among several lenders. Each lender is treated ‘pari passu’, meaning that they all have an equal right to repayment in case of default. No single lender has a priority claim over the other.
Corporate Bankruptcy: In case a company goes bankrupt, all of its creditors are treated ‘pari passu’. This means that whether a claim comes from a large bank or a small supplier, all are given the same priority. They share equally any funds that are left after the company’s assets are liquidated.
Bond Offerings: When a company issues bonds as a method to raise debt, all bonds will often rank ‘pari passu’. That is, all bond holders have an equal claim on the interest payments and the principal repayment. If, for instance, the company becomes insolvent, none of the bond holders can claim their share before the others.
FAQs about Pari Passu
What does Pari Passu mean?
Pari passu is a Latin phrase that means “equal footing” and it is used in finance to describe situations where two or more assets, securities, creditors or obligations are equally managed without any display of preference. An example of pari passu is when a company issues bonds, each investor has an equal right to repayment as other investors.
What does Pari Passu mean in law and finance?
In law and finance, the term pari passu means that all parties or entities are treated equally, without preference. For example, in an insolvency, if debt is issued to many creditors without any form of subordination, the insolvency practitioner cannot pay one creditor in preference to another, or pay one creditor a higher percentage of their debt than another. Hence, all creditors would be paid pari passu.
Does Pari Passu agreement guarantees full payment?
A pari passu agreement does not always guarantee full payment. It simply ensures that all parties are treated equally in terms of payment hierarchy. In the case of a corporation’s bankruptcy, for example, pari passu rules mean that all creditors or shareholders are equally eligible for payment, but if the corporation’s available funds do not cover all debts, some may ultimately get less than they are owed.
Are there any exceptions to Pari Passu?
Yes, there are exceptions to Pari Passu. In some cases, a company may offer preferred stock which may come with a higher claim on assets and earnings than other shareholders. These preferred stockholders are therefore not treated ‘pari passu’ with other common stockholders during times of bankruptcy or liquidation.
Related Entrepreneurship Terms
- Pro Rata
- Senior Debt
- Subordinate Debt
- Unsecured Creditors
- Bankruptcy
Sources for More Information
- Investopedia: An excellent source for all kinds of financial terms and concepts, including Pari Passu.
- Corporate Finance Institute: Provides detailed and professional courses and articles on finance topics.
- Cornell Law School’s Legal Information Institute: Offers reliable information on many legal terms, including those used in finance.
- The Balance: A site that provides expertly written articles on a wide array of financial topics.
