The coupon rate on debt securities like bonds refers to the periodic interest payments made to bondholders. Under a pari passu clause, all bonds issued by a company must have the same coupon rate if they have the same seniority and collateral. If a company lacks sufficient assets to repay all creditors, the principles of pari passu require the limited assets to be distributed proportionally among the unsecured creditors. In essence, the pari passu concept levels the playing field for all lenders involved and upholds the equitable principle of equal treatment. Its inclusion in loan covenants provides balanced rights in terms of priority and recovery.

1. However, an equitable mortgage will be subordinate to the priority given to a legal mortgage.
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3. This continues until the charge ‘crystallizes’, which occurs upon failure of the company to meet the terms of the loan (non-payment, etc), or if the company goes into liquidation, ceases to trade, etc.
4. It is a fact however that terms like ‘lien’ and ‘security interest’ are interpreted by the governing law .
5. Specifically, pari passu prevents creditors from being paid if others with similar claims are not also paid proportionally.

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This means that if a company issues multiple classes of securities like bonds, preferred shares etc., the pari passu clause ensures that all holders of these securities have equal rights over the company’s assets and earnings. On the other hand, Professor Andreas F. Lowenfeld , an expert on the Elliott case, is a firm supporter of the interpretation of the clause given in Elliott. He supports that the idea and meaning of the pari passu clause given in is precise and clear. His sincere opinion is that the clause implies exactly what it says; ‘a given debt will rank equally with other debt of the borrower, whether that borrower is an individual, a company, or a sovereign state’ . Accordingly, if the Republic pays principal or interest to holders of the Brady Bonds or some of them, it is obligated to make a payment of a proportionate amount to all holders of Affected Debt’ including Elliott’ .

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In summary, pari passu is a legal principle upholding equal treatment of creditors in repayment, preventing preferential treatment of one over another. Beyond debt agreements, pari passu can apply to any situation requiring equal legal ranking or priority status. This includes areas like dividend payments, liquidation proceedings, and sometimes even court judgments. Pari passu is a Latin legal phrase meaning “with equal step” or “on equal footing”. It is commonly used in loan agreements and other legal contracts to signify that certain groups will be treated equally.

In case of a company (private limited or public limited), charge on company assets has to be created and then registered with the Securities Exchange Commission of Pakistan (SECP). After registration of mortgage legally, the bank’s lien is recorded in the land register stating that the property is under mortgage and cannot be sold without obtaining an NOC (No Objection Certificate) from the bank. Gains sufficient rights over it so that it is able to enforce its right over the security, such as a right to take possession of the property OR sell it for the purpose of recovery of loan in case of default. In short, the difference between the two terms is that pari passu refers to the relationship between investors, and pro-rata refers to distribution of funds between them. When a company borrows money or takes a loan from a creditor, the creditors would like to know if there are any other creditors in line with those creditors or ranked above them. If such information about creditors has not been revealed or disclosed before they borrow a loan from the creditors, then the company has to repay the loan when asked by the creditors.

1. Philip Wood comments on the negative pledge clause stating that it is ‘one of the most fundamentally important covenants in an unsecured term loan agreement’ .
2. The principle concerns the ranking of lenders’ claims and concomitant security rights in loan transactions.
3. Pari Passu is a standard clause in a financial agreement that ensures equal management and distribution of assets, securities, and debt obligations among creditors.
4. This chapter defines the key terms of the study by providing information on the background of negative pledge in International Finance.
5. The company issues common shares and two bonds, which sit within the same tranche of debt, with the same seniority and rights of payment.
6. The effectiveness of the clause is feasible only if it ensures that, on insolvency, the assets of the company will be distributed evenly amongst all unsecured lenders.
7. Provisions in Philippines or even Spain have allowed the creditor to generate an ex-post right of way.

What does pari passu mean in law?

International law, also known as public international law and the law of nations, is the set of rules, norms, and standards generally accepted in relations between nations. International law is studied as a distinctive part of the general structure of international relations. To summarize the key points, the first point is that the clause ‘does not establish any superiority for the Bank over other creditors’ .

Francis Beaufort Palmer , a leading 19th century English commentator throws light on the purpose of the clause in a secured debenture. He argued that ‘the object of the above pari passu provision is to place all the debentures on the same level as to security; so that, if the security is to be enforced, whatever is realized from it shall be divided amongst them ratably. In essence, Palmer is amongst those who expressed their doubts on the purpose of the clause .

What is more, any ‘attempts to circumvent the clause should not be seen as acceptable to the Bank ‘ . Thirdly, ‘arguments made by staff in favor of waivers have underestimated the risks to the Bank and overestimated the benefits to the borrowing country’ . Last but not least, ‘it is the Bank’s Board of Executive Directors that has the responsibility to decide the issue, and there is a fiduciary responsibility involved’ . Ibrahim Shihata, via the publication of his book ‘The World Bank legal papers’ aims to bring forward various ‘legal opinions and memoranda which issued pari passu charge meaning during my tenure as the World Bank’s General Counsel’ . He has analyzed in great depth the conditions brought forward by the Bank and has provided an insightful analysis of the clause as used by the Bank . More importantly, he provides four key and distinct clarifications on the importance of the clause .

However, an equitable mortgage will be subordinate to the priority given to a legal mortgage. No one is prioritised over the other and both of them will be entitled to get paid on a pro-rata basis. As mentioned above, creditors with pari passu loans will be paid on a pro-rata basis.

The right is purely passive; the secured party (bank) has no right to sell the assets – merely a right to refuse to return them until the loan amount is fully repaid. Likewise, the one registered after that would rank 2nd in order of priority of claim lodgement and would be known as 2nd charge. In case the debtor goes bankrupt and prefers to liquidate all its assets, the creditors will get equal distribution of their investments.

A parity bond refers to two or more bond issues with equal rights of payment or equal seniority to one another. In other words, a parity bond is an issued bond with the same rights to a claim as any other bonds that have already been issued. For example, unsecured bonds have equal rights in that coupons may be claimed without any particular bond having priority over another.