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Pari-Passu

December 5, 2023
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Key Takeaways

Introduction:

In contract law, pari-passu is a Latin phrase that means “equal footing.” It describes situations where two or more assets, securities, creditors, or obligations are equally managed without preference. 

This term is commonly used in reference to bankruptcies, loans, and bonds. Pari-passu ensures that the parties involved have equal standing and are treated fairly in relation to their financial claims or contracts.

Key Takeaways:

  • Pari-passu signifies equal treatment and management of assets, securities, creditors, or obligations.
  • It is commonly used in bankruptcy proceedings, where all creditors are regarded equally and receive the same fractional amount of repayment.
  • Pari-passu clauses are often found in financial vehicles, such as loans and bonds, to ensure equal treatment among similar instruments.

How it Works:

Pari-passu can apply to various aspects of finance, including shares, loans, or bonds with equal seniority or payment rights. 

In the case of shares, pari-passu means that all shareholders, whether holding common or preferred stock, have equal rights to claims for dividends, voting rights, and the liquidation of assets. It ensures fairness and equal treatment among shareholders.

However, it’s important to note that pari-passu does not apply to creditors such as banks. In the event of bankruptcy and liquidation, creditors have a specific pecking order for repayment. 

This means that certain creditors are repaid before others, and shareholders are considered after the repayment of creditors.

Key Components:

  • Pro Rata Distribution: Pari-passu often involves a pro-rata distribution, which means that the distribution of benefits or losses is proportionate to each party’s stake or contribution. This ensures an equitable division of assets or liabilities.
  • Parity Bonds: Parity bonds refer to bonds with equal rights to payment or seniority. For example, unsecured bonds are considered parity bonds as each bondholder has equal rights to claim coupons without any particular bond having priority over another.
  • Secured vs. Unsecured Debts: Pari-passu also applies to the differentiation between secured and unsecured debts. Secured debts have assets backing them, while unsecured debts do not. As a result, unsecured debts may have a greater risk of default or bankruptcy.

Benefits:

  • Equal Treatment: Pari-passu ensures that all parties involved in a financial claim or contract are treated fairly and equally. This promotes transparency and fairness in financial transactions.
  • Proportional Division: The principle of pro rata distribution embedded in pari-passu allows for a proportional division of benefits or losses based on each party’s stake or contribution.
  • Uniformity: Pari-passu brings uniformity and consistency to financial transactions, ensuring that similar instruments or entities are treated equally. This reduces ambiguity and potential disputes.

Takeaway:

Pari-passu is a fundamental concept in contract law and finance that ensures equal treatment among assets, securities, creditors, or obligations. It upholds the principle of fairness and transparency in financial transactions, promoting harmonious dealings among parties involved. 

Understanding the concept of pari-passu is essential for navigating contractual arrangements and financial instruments effectively.

It’s important to seek professional advice and guidance when dealing with pari-passu obligations to ensure compliance with legal requirements and maximize the benefits of fair treatment and distribution.

Disclaimer: The information on this website, including glossary definitions, is for educational and informational purposes only and not intended as professional advice. While we strive for accuracy, we make no guarantees regarding the completeness, reliability, or timeliness of the information provided. We are not liable for any loss or damage arising from your use of the site. Investment decisions in commercial real estate should be made based on individual due diligence and professional advice. Laws and regulations are subject to change; always consult legal and financial experts before making decisions.

Sources:
https://www.investopedia.com/terms/p/pari-passu.asp

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