What is pari passu in a Loan Agreement?

What is Pari Passu in reference to a loan agreement? You’re wondering if I’m swearing at you in Swahili, aren’t you? Well, find out if I am.

Hi everyone, Simon here from the Contract Company. Contracts, that’s what we do, all day and every day and sometimes overnight, lucky us.

Right oh, Pari Passu, what is it? Well, unfortunately for all you Swahili linguists out there, of which I’m sure there are many in Australia  It’s a Latin phrase that means on equal footing.

Now, this is a key clause that, as the lender of money to someone you think is in financial difficulty, you wanna make sure that your agreement has a Pari Passu clause in it.

And what that means is, is it means that you rank as the lender of the money equally with everyone else who’s lent someone money.

Pari Passu Example

So let’s use a silly example, but my hope, it gets the point across.

Let’s say, there’s a company and a few people are lending money to the company to prop it up. What often happens is when it comes to insolvency in getting money, so sorry.

Let’s say the company falls or experiences financial difficulty and they’re then. Then there’s an issue because there’s only so much money left in the company. Then there’s an issue as to which people who’ve lent the company money get paid back their money.

So think of it this way. Company’s here and you have a line of people lining up. What often happens is that creditors want to be at the front of that cue. Meaning if you’re at the front of the cue, you’re the first person to get paid from any money that’s left in the company.

So you wanna be at the front of that cue to get your money so you can recover the amount you’ve lent the company. And then whatever’s left goes to the second person, third person, fourth person down the line.

So, as you can imagine, if you’re at the end of that cue, your chance of getting your money back that you lent the company, pretty close to zero.

What Pari Passu Does

But what Pari Passu does, it says instead of there being the company here and the line of creditors, the company’s here, and there’s a circle around ’em.

Meaning they all rank equally, and the money gets divided out equally. So if there was only say, a thousand dollars and ten creditors, and every one of them gets a hundred dollars, the amount divided by the creditors.

So that’s what Pari Passu means in terms of loan agreements. I hope I’ve given you some context to understand that. I needed to work that out myself too.

Anyway, any questions, please give us a call, Simon at contractcompany.com.au or 1-800-355-455. Thanks very much.

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