Usage: Refers to situations where two or more assets, securities, creditors, or obligations are treated equally without preference.
Common Example: Used during bankruptcy to ensure creditors are treated equally, repaid in equal fractional amounts.
Key Concepts
Pari-Passu in Financial Contracts
Loans and Bonds: Often include pari-passu clauses to ensure all parties are treated equally.
Bankruptcy and Trusts: Used to distribute claims or assets equally.
Wills: Clauses can be used to ensure equal distribution among beneficiaries.
How Pari-Passu Works
Equity Shares: New equity shares have equal rights with existing shares, ensuring equal claims for dividends, voting rights, and liquidation assets.
Creditors: Does not apply to creditors vs. shareholders; creditors are paid first in bankruptcy.
Assets and Securities: Stocks can be pari-passu if they rank equally for dividends and liquidation.
Wills and Trusts: Ensure equal distribution among beneficiaries.
Pari-Passu and Unsecured Debts
Unsecured Debts: Not backed by an asset, thus often equal among obligations.
Parity Bonds: Bonds with equal rights of payment or seniority.
Comparison with Pro Rata
Pro Rata: Means "in proportion," used when parties have unequal stakes.
Example: In default scenarios, pari-passu obligations might result in pro-rata divisions.
Examples of Pari-Passu
Parity Bonds: Bonds with equal rights to coupon yield.
Senior vs. Junior Lien Bonds: Secured debts have senior lien over unsecured (junior) debts.
FAQs
Meaning in Finance: Used in contract law for equal management of assets or obligations.
Difference from Pro Rata: Pari-passu refers more to seniority, pro rata to proportional distribution.
Application in Real Estate: Used for pro-rata distribution in profit models based on investment percentage.
Conclusion
Pari-Passu's Meaning: A concept of equal treatment in financial claims or contracts applicable to shares, loans, bonds with equal seniority or payment rights.