What Does Pari Passu Mean?
Pari passu is a Latin phrase meaning “on equal footing” or “at an equal pace.” In M&A and corporate finance, it describes the equal ranking of claims, securities, or obligations — ensuring that no party in the same class receives preferential treatment over another. When creditors hold pari passu claims, they are paid proportionally from available funds rather than one being paid before another.
The concept is fundamental to the capital structure of any business. It defines the rules of sharing among creditors of equal rank and provides the contractual foundation for the priority waterfall that governs how value is distributed in both normal operations and insolvency scenarios.
How Pari Passu Works
In Debt Instruments
A pari passu clause in a bond indenture or loan agreement ensures that the obligations rank equally with the issuer’s other unsecured, unsubordinated obligations:
“The Notes constitute direct, unconditional, unsubordinated and unsecured obligations of the Issuer and rank pari passu among themselves and with all other unsecured and unsubordinated obligations of the Issuer.”
This means:
- No other unsecured creditor has a better claim on the company’s assets
- In liquidation, all pari passu creditors share proportionally
- The issuer cannot subsequently create senior claims that would subordinate these obligations (absent a specific carve-out)
In Equity
Shares of the same class are pari passu — each share carries identical rights to dividends, voting, and distribution in liquidation. When a company issues new shares of the same class, they rank pari passu with existing shares.
In M&A
Pari passu provisions appear in several M&A contexts:
| Context | Application |
|---|---|
| Indemnification | Multiple sellers share indemnification obligations on a pari passu basis (pro rata to their ownership) |
| Escrow claims | Claims against the escrow fund are satisfied pari passu if the fund is insufficient |
| Earnout payments | Multiple sellers receive earnout payments on a pari passu basis |
| Acquisition debt | Multiple tranches of senior debt rank pari passu with each other |
Pari Passu vs. Subordination
The opposite of pari passu is subordination — where one claim is contractually or structurally ranked below another:
| Relationship | Meaning | Example |
|---|---|---|
| Pari passu | Equal ranking | Two unsecured bond issues from the same issuer |
| Senior | Higher priority | Secured bank debt vs. unsecured bonds |
| Subordinated | Lower priority | Mezzanine debt vs. senior debt |
The NML Capital Case
The most significant modern dispute over pari passu interpretation was NML Capital v. Republic of Argentina (2012-2016). The US Court of Appeals for the Second Circuit interpreted Argentina’s pari passu clause to require “ratable payment” — Argentina could not pay its restructured bondholders without making proportional payments to holdout creditors who had refused to participate in the debt restructuring.
The case had profound implications for sovereign debt restructuring and was widely discussed in financial and legal literature, including analysis by the International Monetary Fund. It demonstrated that pari passu clauses, once considered largely ceremonial, could have dramatic enforcement consequences.
APAC Context
Australia — pari passu ranking is a standard feature of Australian debt instruments. The Corporations Act’s insolvency provisions enforce proportional distribution among creditors of equal rank in both voluntary administration and liquidation.
Hong Kong — Hong Kong’s corporate debt market uses pari passu clauses consistent with international standards. The Companies (Winding Up and Miscellaneous Provisions) Ordinance provides the statutory framework for equal treatment of creditors within the same class.
Singapore — Singapore’s Insolvency, Restructuring and Dissolution Act codifies the pari passu principle in its distribution provisions. Singapore’s growing role as a regional debt restructuring hub has increased the practical significance of pari passu interpretation.
“Pari passu is one of those concepts that seems simple until it is tested in a distressed situation,” observes Daniel Bae, founder of Amafi. “In APAC acquisition financing, ensuring that the acquisition debt correctly ranks pari passu with other obligations is a fundamental structuring requirement.”
Structuring acquisition financing across Asia Pacific? Amafi helps companies and investors navigate capital structure and debt arrangements. Learn more.