Pari passu

Pari passu is a Latin phrase that literally means "with an equal step" or "on equal footing". It is sometimes translated as "ranking equally", "hand-in-hand", "with equal force", or "moving together", and by extension, "fairly", "without partiality".

    Etymology

    This term is commonly used in law. Black's Law Dictionary (8th ed., 2004) defines pari passu as "proportionally; at an equal pace; without preference".

    Usage

    In inheritance

    In inheritance, an in pari passu (per capita) distribution can be distinguished from a per stirpes (by family branch) distribution.

    For example, suppose a testator had two children A and B. A has two children, and B has three. The testator leaves his entire estate to his grandchildren in equal shares in pari passu, each grandchild would inherit one fifth of the estate. If the testator left his entire estate to his grandchildren per stirpes (by family branch), the children of A would share one half of the estate equally between the two of them, and the children of B would share one half of the estate equally amongst the three of them.

    The problem with a per capita in pari passu distribution in the example given is as follows. Assume A dies before B. On A's death a distribution could not be made to his or her children: they would have to await the death of B - on the assumption that B could have additional children, and thereby consequently all grandchildren (of both A and B) would be entitled to less than one fifth each.

    In lending, bankruptcy and default

    This term is also often used in the lending area and in bankruptcy proceedings, where are said to be paid pari passu, or each creditor is paid pro rata in accordance with the amount of his claim. Here its meaning is "equally and without preference".

    There have been cases where decisions were based on different interpretations of the term.

    In the European Union, as the result of the Greek government-debt crisis, a retroactive Collective action clause passed by the Greek government with the support of the ECB and IMF, enabled the debtor (who also controlled the courts) to impose a 70% loss on the creditors, more than 75% of whom had voted in favour of the cut. In this case, pari passu means that all private-sector investors are equally treated.

    See also

    • Statute of Bankrupts Act 1542, introducing the pari passu principle for creditors of insolvent persons. Pari passu means treat at par from the previous issue.
    • Seniority (finance)
    • List of Latin Phrases
    • Collective action clause
    • Rights upon future offers

    References

    Notes

    Further reading

    • law.georgetown.edu the pari passu clause in sovereign debt instruments
    • An analysis of Section 334 of the Companies Act and its effect on proceedings for the enforcement of Judgments - Section 334 and the pari passu principle
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