Pari passu guarantees: Overview, definition, and example
What are pari passu guarantees?
Pari passu guarantees refer to a type of guarantee in which multiple creditors or parties are treated equally in terms of their claim to repayment or assets. The term "pari passu" is Latin for "equal footing" or "at the same pace," and it is often used in financial agreements to indicate that each party has the same priority level when it comes to receiving payments or distributions.
In the context of guarantees, a pari passu guarantee ensures that, in the event of a default or liquidation, all creditors or parties covered by the guarantee will receive an equal proportion of any available funds or assets. This means no creditor will be prioritized over another, and all parties will share equally in the distribution.
Why are pari passu guarantees important?
Pari passu guarantees are important because they help ensure fairness and equality among creditors or parties in a financial arrangement. By providing equal treatment to all parties, a pari passu guarantee reduces the risk of favoritism or bias in the event of default or liquidation. It helps provide confidence to all stakeholders involved, knowing that they have the same rights and priority for repayment.
For businesses, offering a pari passu guarantee can be a way to attract multiple investors or lenders by assuring them that their claims will be treated equally. For creditors, it ensures they have an equal opportunity to recover their investments in case of financial distress or default by the business.
Understanding pari passu guarantees through an example
Imagine a company that borrows $1 million from two banks, each lending $500,000. The loan agreement includes a pari passu guarantee, which means that if the company defaults on the loan or goes into liquidation, both banks will be entitled to receive an equal share of the available funds.
In the event that the company’s assets are sold off and only $600,000 in total is recovered, each bank would receive $300,000, as they are on equal footing. No bank would be entitled to a greater share than the other, regardless of the size of their loan.
In another example, a business issues bonds to several investors with pari passu guarantees, meaning that if the company experiences financial trouble and has to pay out claims, the bondholders will all be treated equally and receive payments at the same rate, based on the company’s available funds.
An example of a pari passu guarantees clause
Here’s how a pari passu guarantees clause might look in a contract:
“The Issuer hereby guarantees that all outstanding debt obligations under this Agreement shall rank pari passu in right of payment, meaning that in the event of liquidation or default, all creditors shall receive equal treatment with no priority given to any individual creditor. Payments to creditors shall be made in proportion to their respective claims.”
Conclusion
Pari passu guarantees ensure that all parties involved in a financial agreement are treated equally when it comes to repayment or claims on assets. This type of guarantee is important for maintaining fairness and transparency in business transactions, providing assurance to creditors and investors that they will have equal priority. By offering pari passu guarantees, businesses can attract multiple creditors while also ensuring that their financial arrangements are fair and transparent.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.