Pari Passu is a latin phrase which means “with an equal footing” or “with an equal step”. It is sometimes translated as” ranking equally.”
It means when more than one creditor has a charge like mortgage on the same property though created at different times, if they agree among themselves, their charge/mortgage will rank equal in enforcement.
The Pari-Passu Charge provides an equivalent right to the share of specified assets of a borrowing company to all the lenders under the arrangements. In the event of default of repayment from the borrower the joint lenders may decide to dispose-off the security held by them in order to recover their dues.
The realization proceeds of the assets disposed-off would be shared among joint lenders in proportion to the balances outstanding in their accounts.
If a lender provides an unsecured loan to a business, it may include a pari-passu clause in the contract. Which means that if the borrower goes bankrupt, the lender will have equal rights of payment and rank as all the other borrower’s unsecured creditors.
MERITS OF PARI PASSU CHARGE :-
- This clause is used to protect the investors.
- The new lenders prefer the term pari-passu in order to minimize risks and secure their investments.
- It prevents other lenders from swooping in and claiming seniority just because they issued a loan earlier.
Thus, in a nutshell, if the company’s debts are Pari Passu, they are all ranked equally, so the company pays each creditor the same amount in insolvency. It is an important clause for creditors of a company in financial difficulty which might become insolvent.