What Is Pari Passu? The Principle of Equal Treatment

“Pari passu” is a Latin phrase meaning “on equal footing” or “with equal step.” Its application signifies a principle of equal treatment without preference. This concept is fundamental in various situations where multiple parties or obligations are involved, ensuring fairness in how claims or burdens are managed.

The Fundamental Principle

The core concept of “pari passu” dictates that all parties or assets within a defined group are treated identically. The principle aims to achieve fairness and predictability in financial and legal outcomes by eliminating arbitrary preferences.

While related, “pari passu” is distinct from “pro rata.” “Pari passu” establishes the equal ranking or seniority of claims, meaning no one claim within a specific class holds a superior position. Conversely, “pro rata” describes the proportional distribution of assets or liabilities based on each party’s share or contribution, which often follows the establishment of “pari passu” ranking. For instance, if claims are ranked “pari passu,” any available funds would then be distributed “pro rata” among those equally ranked claims according to their individual amounts. This two-step approach ensures both equal standing and proportional allocation.

Application in Debt and Lending

The “pari passu” principle is incorporated into debt agreements, bonds, and loan contracts through specific clauses. These clauses stipulate that certain debt obligations or creditors will rank equally in their claim to repayment. For example, in syndicated loans, where multiple lenders collectively provide funds to a borrower, a “pari passu” clause ensures that all participating lenders within the same class have an equal claim to interest and principal payments.

For lenders, a “pari passu” clause offers assurance that their loan will not be involuntarily subordinated to other debts of the same rank. It provides a level of protection, knowing that if the borrower faces financial distress, their claim will be treated equally alongside other equally ranked creditors.

Application in Bankruptcy and Insolvency

In bankruptcy and insolvency proceedings, the “pari passu” principle serves as a fundamental rule for distributing a debtor’s limited assets among creditors. Generally, unsecured creditors are treated “pari passu,” meaning they share proportionately in any available assets after higher-priority claims, such as those of secured creditors, have been satisfied. This ensures that no unsecured creditor receives preferential treatment over another within their class, promoting fairness and equitable distribution.

The goal of applying “pari passu” in bankruptcy is to prevent a “race to the assets” where individual creditors might attempt to seize property, thereby disadvantaging others. Instead, a trustee or liquidator manages the assets, and the proceeds are distributed “pro rata” based on the size of each unsecured creditor’s claim. While secured creditors, who hold a lien on specific assets, typically have priority, the “pari passu” principle ensures that once those secured claims are addressed, the remaining assets are divided fairly among all unsecured parties.

Application in Legal Judgments and Settlements

The “pari passu” principle also extends to general legal contexts, particularly in the execution of court judgments and settlements. When a court orders the distribution of funds or the bearing of liabilities among multiple parties, it may mandate that these actions occur “pari passu.” This ensures that all designated parties are treated equally in the outcome.

For instance, if a limited settlement fund is available to compensate multiple plaintiffs who have equally valid claims, a court might direct that the funds be distributed “pari passu” among them. This means each plaintiff would receive a proportional share of the available money based on the extent of their damages, rather than one receiving full compensation while others receive nothing. Similarly, in cases involving co-defendants found equally liable, the court could order that the burden of judgment be shared “pari passu,” ensuring an equitable division of responsibility. This application reinforces the concept of equal treatment in legal resolutions.