This is particularly relevant in scenarios involving preferred shares, where investors may have specific rights and privileges. A pari passu clause in this context ensures that all preferred shareholders are treated equally in terms of dividends and liquidation preferences. For instance, if a company is liquidated, a pari passu clause would ensure that all preferred shareholders receive their due share of the remaining assets before any distribution to common shareholders. This provision helps in maintaining investor confidence, as it guarantees that their investments will be treated equitably, thereby encouraging more participation in equity markets. Most of the large borrowers are financed by multiple banks in a consortium or under a Joint Lending Arrangement (JLA). Each bank that participates in the joint lending program takes a share of a certain percentage of the total amount of finance under uniform terms and conditions including the rate of interest.

Explore the legal framework and implications of pari passu clauses in debt agreements, equity financing, and bankruptcy, and their impact on creditors. This term is used to describe a similar ranking of securities or lenders when a new issue of shares is made, they could be said to rank pari passu. A common agreement between joint lenders is a pari passu clause under which, in the event of a shortfall, they agree to share equally whatever is available.

Understanding First Charge, Second Charge, and Pari Passu Charge in Financing

The court of law always rules in favor of equal pay to the insolvent company’s creditors in proportion to the debt they still owe. The clause is applicable in any situation where two or more parties have equal rights over an asset, property, or debt obligation. The creditors receive the payment on a pro-rata basis, i.e., in proportion to their investment, without seniority and at the same time. Pari-passu is a Latin phrase that means “equal footing” and describes situations in which two or more assets, securities, creditors, or obligations are treated equally, without preference or priority. If a firm becomes bankrupt, liquidates its assets, or has outstanding loans or debts, it must repay its creditors first.

Common shares

The enforcement of pari passu clauses often involves judicial interpretation, where courts play a pivotal role in determining the application of these provisions. Courts may examine the language of the contract, the intent of the parties, and the overall context of the agreement to ensure that the pari passu principle is upheld. This judicial oversight is crucial in maintaining the integrity of financial markets and protecting the interests of creditors. Pari passu agreement protects the initial investments made by pari passu charge meaning shareholders when a company goes bankrupt.

Pari Passu in Equity Financing

Counterintuitively, some pari passu obligations might result in a pro-rata division of benefits. Dividing the asset in proportion to each party’s contribution is the only way to ensure an equal footing. In the corporate sector, the case of Re Maxwell Communications Corporation plc is often cited. This case involved the insolvency of a multinational media company and required the courts to navigate the interplay between English and U.S. insolvency laws. The court’s decision to uphold the pari passu principle across different jurisdictions demonstrated the clause’s robustness and its critical role in cross-border insolvencies. When companies issue bonds to raise capital, the clause assures that each bond is equal.

Thus pari passu charge means, having equivalent charge/ rights or say charge-holders have equal rights over the asset on which pari pasu charge is created. In cross-border transactions, the pari passu principle can become complex due to differing legal systems and regulatory environments. Pari-passu is a Latin phrase used in contract law that describes situations where two or more assets, securities, creditors, or obligations are equally managed without preference. The term is most commonly found in reference to elements of bankruptcies, loans, and bonds. Within the marketplace, all new equity shares (called a secondary offering) have equal rights with existing shares or those that were previously issued. Pari-passu can apply to common stock shares, for example, so that each shareholder has equal rights to claims for dividends, voting rights, and the liquidation of assets.

Investments

In the early 2000s, Argentina defaulted on its debt, leading to a protracted legal battle with holdout creditors who refused to accept the restructuring terms. The U.S. courts ruled that Argentina’s payment to restructured bondholders without making a ratable payment to holdout creditors violated the pari passu clause. This decision underscored the importance of equal treatment and set a precedent for future sovereign debt restructurings.

A co-lending solution requires that lenders enter into a “pari-passu” or “asymmetrical” agreement that establishes how sums will be allocated between each creditor in case of realization. In a pari-passu co-financing agreement, in vertu of which all lenders are of equal rank, the sums would be allocated at the pro rata of the balance due to each lender. In an asymmetrical co-financing agreement, the sums would be allocated according to a predetermined percentage. The type of agreement (pari-passu or asymmetrical) will depend on how the lenders want to share the realization proceeds, if such an event were to occur. To summarize, an exclusive charge provides a lender with priority rights over specific assets, and other lenders are excluded from making claims on those assets.

In other words, the lack of equality in the right to payment nullifies the provision in such situations. In consortium, there is always pari passu charge on primary security as well as collateral security. But, in other cases, all the lenders (existing as well as new) must agree for sharing of pari-passu charge on primary securities or collateral securities as the case may. 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.

Most of the large borrowers are financed by multiple banks in a consortium or under Joint Lending Arrangement (JLA). When multiple banks finance to a single borrower under consortium arrangement or multiple banking, there are certain common assets, on which all the lenders share charge. Suppose SBI, BOI and PNB have financed working capital of Rs.25 crore, Rs.50 Crores and 100 Crores each to M/s ABC Ltd. All the three banks will have pari pasu charge on the stocks, debtors and other current assets of M/s ABC Ltd.

• If a Subsequent charge is created in favour of a different lender against the same assets on which the first charge already exists, the subsequent charge holder is called the holder of the second charge.
• This principle ensures that all creditors of the same class are treated equally, without any preference or priority.
• Once a Pari passu agreement is executed, all the parties to the agreement are treated equally and there is no ranking or seniority.
• In an asymmetrical co-financing agreement, the sums would be allocated according to a predetermined percentage.
• The pari passu principle is often enshrined in bankruptcy laws and regulations, ensuring that the process is transparent and just for all parties involved.

If borrower is a company, charge must be registered with registrar of companies within 30 days from the date of creation of charge. If not registered within 30 days, charge may be registered with ROC within 360 days with payment specified late fee. Pro-rata and pari passu are two important principles in commercial real estate transactions. However, even though they are used in asset distribution simultaneously, they have different meanings. Pro rata is another Latin term that means “in proportion.” This term is usually used in situations where two parties have an unequal stake in a business or enterprise.

Pari-Passu and Unsecured Debts

This provision is particularly important in syndicated loans, where multiple lenders provide a loan to a single borrower. The pari passu clause ensures that each lender receives an equal share of any repayments, thereby reducing the risk of preferential treatment. This equitable distribution is crucial for maintaining trust and stability in financial markets, as it assures creditors that their claims will be treated fairly. In bankruptcy proceedings, pari passu clauses play a critical role in the distribution of a debtor’s assets among creditors. The principle ensures that all unsecured creditors are treated equally, without any preference or priority. This means that each creditor receives a proportionate share of the debtor’s assets based on the amount of their claim.

Assets and Securities

For example, unsecured bonds have equal rights in that coupons may be claimed without any particular bond having priority over another. Since an asset backs secured debts, they are often not fully equal to the other obligations held by the borrower. Since no asset supports unsecured debts, there are greater instances of borrower default or bankruptcy. The investment of party ABC was declared as Pari-passu to all other types of investment. This agreement will enable the party ABC with the same rights and privileges as that of other parties ITC and AHP.

The leader bank (usually the bank that takes up the largest share of the limits deemed to be the leader of the consortium/JLA) will hold the common documentation executed by the borrowing company. This type of charge created through common documents on behalf of multiple banks is called the Pari-Passu charge. The law requires such charges on assets of the company to be registered at ROC within 30 days from the date of creation of the charge or such extended time permitted by the ROC. Pari passu is a standard clause in a financial agreement that ensures that creditors to a contract or claims to assets, properties, securities, and debt obligations are treated equally. It is commonly employed in bankruptcy, liquidation, inheritance, insolvency, asset management, financing, wills and trusts, and debt. The clause would provide every stakeholder equal rights over liquidation, dividends, and voting as soon as the parties sign the contract.

• The presence of pari passu clauses in financial agreements has profound implications for creditors, particularly in the context of debt restructuring.
• In cross-border transactions, the pari passu principle can become complex due to differing legal systems and regulatory environments.
• For example, if a company becomes bankrupt, liquidates its assets, or has outstanding loans or debts, its creditors must be paid first.
• Pari-passu can apply to common stock shares, for example, so that each shareholder has equal rights to claims for dividends, voting rights, and the liquidation of assets.

The lender in whose favour charge is first created is called the holder of ‘First Charge’. If a Subsequent charge is created in favour of a different lender against the same assets on which the first charge already exists, the subsequent charge holder is called the holder of the second charge. The bank which releases working capital finance will have the first charge over working capital (stocks of raw material, work-in-progress, finished goods, and receivables) funded by it.