Everything You Need to Know About Pari Passu Clauses in Loans

Lien is a legal right/claim to take and hold or possess the property/assets/documentary intangibles/certificates/accounts/deposits, etc., of a debtor as security against a loan or for payment of a loan. A fixed charge is a charge created/secured/registered on a particular asset of the company, e.g., land and buildings, a ship, plant or machinery, shares, intellectual property rights such as copyrights, patents, trade marks, etc. The charge is said to float over the assets charged, rather than fixing on any of them specifically. This continues until the charge ‘crystallizes’, which occurs upon failure of the company to meet the terms of the loan (non-payment, etc), or if the company goes into liquidation, ceases to trade, etc.

What does it mean on the context of a Loan Agreement?

The parity between debt securities must be maintained through equivalent coupon rates. But having a solid grasp of pari passu can make a real difference pari passu charge meaning in legal matters involving bankruptcy, corporate finance, and securities. Pari-passu can be applied to all bonds issued by the company; however, they can also apply the pari-passu principle to specific tranches of debt to hold that within each tranche, the principle holds. It may be problematic if the pari-passu principle is held across multiple tranches. When companies issue bonds to raise capital, the clause assures that each bond is equal.

1. Therefore, unsecured bonds would be referred to as parity bonds with each other.
2. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses.
3. It is commonly used in loan agreements and other legal contracts to signify that certain groups will be treated equally.
4. Pari-passu usually comes into play when dealing with unsecured debt obligations.
5. The Counsel for the case alleged that the clause contained in the loan agreement was plainly a sharing clause which compelled Congo to pay the claimant on a pro rata basis once it pays other creditors.

Reflecting on South Africa’s mining future

To begin with, the pari passu clause has been ‘mistakenly migrated from a secured private lending to an unsecured sovereign lending’ . Provisions in Philippines or even Spain have allowed the creditor to generate an ex-post right of way. Consequently, the pari passu clause has an underlying principle and has therefore become quite the well-liked proviso in this kind of debt instrument. After that, pari passu clauses remained in unsecured debt instruments because of the certain fears brought forwards.

However, the principle would not hold between the bonds and the stock since the bonds would hold a priority of payment to the stock. The company issues common shares and two bonds, which sit within the same tranche of debt, with the same seniority and rights of payment. However, they are different in terms of yield, coupon rates, maturity, and payment periodicity.

Assets and Securities

As complex debt structures continue to evolve, the principle of pari passu maintains relevance in ensuring equitable treatment of creditors. Its interpretation will likely come under scrutiny in future test cases globally. Pari passu is one of several key legal maxims that underpin securities regulations and case law precedents. By enshrining the equal treatment of security holders into law, legal maxims like pari passu aim to protect investors and promote fair markets.

It is an equitable charge on (usually) all the company’s assets both present and future, on terms that the company may deal with the assets in the ordinary course of business. Sometimes the charge is over just a class of the company’s assets, such as its stock or movable or current assets. This generally means that if the debtor goes bankrupt and has to liquidate all his assets, the creditors will be able to recover money from the debtor and it will be divided between the creditors on a pro-rata basis. It implies that all the creditors ranked equally will recover their share from the liquidated assets.

What Does Pari-Passu Mean in Finance?

If there are 4 creditors and the liquidated assets will be distributed between four of them equally. Pari passu is a Latin term which means ranked equally whereas, pro-rata means in proportion. Usually in a real estate agreement, pro-rata refers to the proportional distribution of obligations and profits. To take an example for pro-rata, where one person has invested money for 70% of  a property and another has contributed 30%, then obligations and profits will be distributed proportionally to each of them. There are two types of creditors, one is a secured creditor and the other is an unsecured creditor. Pari Passu clauses are relevant to unsecured creditors only where the loan is not secured by any collateral such as a house or a car.

Borrower’s property / assets / possessions until the loan facility is fully repaid by the borrower. The right of lien generally arises by operation of law, but it can also be created by express contract. These include floating charge, fixed charge, exclusive charge, pari passu charge, ranking charges, etc. In an equitable mortgage the lender is secured by taking possession of all the original title documents of the property and by getting the borrower sign a Memorandum of Deposit of Title Deed (MODTD).

1. The right is purely passive; the secured party (bank) has no right to sell the assets – merely a right to refuse to return them until the loan amount is fully repaid.
2. The FMLC , via their report , introduce a number of situations that come into play, out of which the first and foremost is the fact that most jurisdictions have their own rules as far as the priority of payment of debts in a corporate liquidation is concerned.
3. This type specifies that in the event of a breach of the clause the lender is deemed to be equally and ratably secured on the same asset as the secured creditor it.
4. The pari passu concept essentially means that certain parties will receive equal treatment.
5. For example, within the tranche of senior secured debt holders, the principle can apply to those creditors within that tranche.

Furthermore, the finalization of the security arrangements is an unremarkable condition of whether the Loan and Guarantee Agreements is validated in the event that the IBRD depends upon security. This also occurs in a situation where a member requires security with the intention of securing the borrower’s responsibility to the member relating to the guarantee. Recent cases on the other have insisted on and imposed the existence of specific intention so as to inflict economic harm.

The purpose of this chapter is to define the objectives of this study in relation to the negative pledge clause . This chapter defines the key terms of the study by providing information on the background of negative pledge in International Finance. Additionally, it provides the author’s reasoning behind the idea of this research paper. The purpose of this chapter is to define the objectives of this study in relation to the pari passu clause . This chapter defines the key terms of the study by providing information on the background of pari passu in International Finance. It may include, but not limited to, assets acquired through financing sanctioned to the customers, e.g. machinery, stocks, etc. as well as current assets, fixed assets, real estate, liquid assets, etc.

The bonds are issued on a Pari-passu basis to enlighten the fact that no priority will be given to any bondholders who purchased it either at an earlier or a later date. Including a pari passu clause provides assurance to lenders that their claims will be treated on an equal footing. If the borrower defaults or goes into liquidation, all pari passu creditors will be repaid pro rata based on the amount owed to them.

This means that both terms pari passu and pro-rata are used in conjunction with each other. Although these terms complement each other, they are different in their meaning and are not the same. The pari passu clause is important for a company as a borrower because it ensures that the clauses are properly drafted and accurate. They also need to ensure that the clauses don’t limit the company’s future borrowings as a borrower. Our courts have interpreted the term pari passu to mean equally and without preference. The judgments in Nulliah v Harper 1930 AD 141, Donaldson Investments (Pty) Ltd v Anglo-Transvaal Collieries 1979 (3) SA 713 (W) and Absa Bank Ltd v Moore and Another 2017 (1) SA 255 (CC) are some of the judgments that deal with the pari passu principle.

First pari passu charge also gives the lender certain rights over dealing with the asset. Approval is needed from all first charge holders before the borrower can sell, lease or further encumber that asset. In fixed-income investments, the coupon is the annual interest rate paid on a bond. If new bonds with a 5% coupon are issued as parity bonds, the new bonds will pay $50 per year, but bondholders will have equal rights to the coupon.