Pari passu

The Latin expression pari passu, literally on an equal step, denotes the principle whereby several creditors or financial instruments are treated on a strictly equal footing, with no priority of one over another. A pari passu clause thus guarantees that, in the event of partial payment or distribution of an asset, the holders concerned will be served in the same proportions and at the same rank.

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In debt contracts, the pari passu clause assures a lender that its claim will not be subordinated to that of another creditor of the same category incurred later. It stands against the Contractual subordination mechanisms organised by an Intercreditor agreement, which, on the contrary, deliberately rank the tiers between Senior debt and junior debts.

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For example, two lenders each advance 5 MCHF at the same pari passu rank. In the event of partial recovery allowing only 6 MCHF to be distributed, each receives 3 MCHF, that is 60% of its claim, neither ranking ahead of the other.

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The principle also applies to equity, where shares of the same class confer identical rights, or in shareholder agreements. Properly understood, pari passu is essential to analysing a creditor's or investor's true rank, decisive information in financial due diligence for assessing the risk actually borne.