Pari passu is a Latin phrase meaning “with equal step.” In law and finance, it signals that two or more creditors, investors, or beneficiaries share the same rank in their right to payment. When claims are pari passu, no one in that group can jump ahead of the others to collect first, and if there is not enough money to go around, everyone in the group takes the same percentage hit.
What Equal Ranking Actually Means
Every borrower creates a hierarchy of who gets paid first if things go wrong. Pari passu describes a single rung on that ladder. Two bonds that rank pari passu with each other have identical claims against the issuer, so the issuer cannot choose to pay one and skip the other.
The equal footing applies only within the same tier. A secured lender with collateral almost always outranks an unsecured lender, no matter what the unsecured loan documents say about pari passu status. Secured debt gets first claim on the collateral up to the value of the debt, and nothing about equal ranking among unsecured creditors changes that. The concept does its real work among creditors holding the same type of claim with the same level of security.
Pari Passu vs. Subordination
The clearest way to see pari passu is to compare it with its opposite. Subordination means one debt is deliberately ranked below another. A subordinated lender agrees to wait until senior debt is fully repaid before collecting anything. Mezzanine debt and second-lien loans are common examples. If a borrower defaults and the available money covers senior claims but nothing else, the subordinated lender walks away empty-handed.
Pari passu creditors share whatever is available in their tier proportionally. Nobody is wiped out while someone at the same level collects in full. That difference drives interest rates, recovery expectations, and much of the negotiation that happens when a loan is put together.
How the Pro Rata Math Works
When a company cannot pay everyone in a given class, pari passu ranking translates into pro rata distribution. Each creditor in the class receives the same percentage of what it is owed. Divide the money available by the total claims in the class, then apply that recovery rate to each individual claim.
Say a company has $600,000 left to split among three unsecured creditors. Creditor A is owed $400,000, Creditor B is owed $300,000, and Creditor C is owed $100,000. Total claims come to $800,000, so the recovery rate is 75%. Creditor A receives $300,000, Creditor B receives $225,000, and Creditor C receives $75,000. Different dollar amounts, identical recovery percentage. That is the core of pro rata.
In a Chapter 7 liquidation, federal law codifies this approach. Property of the estate is paid first to priority claimants in the statutory order, then to general unsecured creditors, then to late-filed claims, and so on. Within each tier, payment is made pro rata among claims of the same kind.1Office of the Law Revision Counsel. 11 USC 726 – Distribution of Property of the Estate The rule kicks in whenever there is not enough to pay a class in full.
When the Law Overrides Equal Ranking
Pari passu is the default, not an absolute guarantee. Three mechanisms in bankruptcy can push a creditor above or below the rank it expected.
Priority Claims
Certain debts skip ahead of general unsecured creditors by statute. The Bankruptcy Code sets out a priority ladder that includes administrative expenses of running the case, employee wages earned within 180 days before filing (up to a statutory cap per individual), and various categories of tax obligations.2Office of the Law Revision Counsel. 11 USC 507 – Priorities These claims must be paid in full before general unsecured creditors see a dollar. Administrative expenses alone can consume a significant share of the estate, since the category covers trustee compensation, attorney fees, and the cost of preserving estate property after filing.3Office of the Law Revision Counsel. 11 USC 503 – Allowance of Administrative Expenses
Equitable Subordination
A bankruptcy court can demote a creditor’s claim below other claims of the same class if the creditor engaged in unfair or fraudulent conduct. The power, called equitable subordination, is codified at 11 U.S.C. ยง 510(c), which allows the court to subordinate all or part of an allowed claim to another after notice and a hearing.4Office of the Law Revision Counsel. 11 USC 510 – Subordination Courts have typically applied the doctrine against insiders such as corporate officers or controlling shareholders who exploited their position at the expense of outside creditors. A creditor that was supposed to rank pari passu with others can lose that equal status entirely if it behaved inequitably.
Convenience Classes
A reorganization plan can carve out a separate class for small claims. Federal law allows a plan to designate a class consisting of every unsecured claim below an amount the court approves as reasonable and necessary for administrative convenience.5Office of the Law Revision Counsel. 11 USC 1122 – Classification of Claims or Interests Small claimants in that class may receive a higher percentage recovery, or even full payment, while larger unsecured creditors in the main class share pro rata in whatever remains. The logic is practical: tracking tiny distributions to hundreds of small creditors costs more than it is worth.
The Pari Passu Clause in Contracts
Loan agreements and bond indentures do not leave equal ranking to background law. They include a specific pari passu clause, a written promise from the borrower that this debt ranks at least equally with all of the borrower’s other unsecured and unsubordinated obligations. A sovereign bond, for example, might state that the notes “constitute direct, unconditional, unsecured and unsubordinated obligations” of the issuer and “shall at all times rank pari passu and without any preference among themselves.”
These clauses usually carve out exceptions for debts that get statutory priority anyway, such as government tax claims and employee wage claims. The clause acknowledges that while the debt sits equal to other commercial borrowing, it cannot override the priority ladder bankruptcy law imposes. Negotiating the scope of those exceptions is where much of the legal drafting work happens, because the language determines which obligations count as truly pari passu and which sit outside the promise.
A poorly drafted clause can create expensive ambiguity. In sovereign debt markets, decades of litigation have turned on whether a pari passu clause merely guarantees equal legal ranking or goes further and requires the borrower to make proportional payments to all creditors whenever it pays any of them.
Where You’ll See Pari Passu in Practice
Sovereign Bonds
Sovereign debt is where these clauses have produced the most dramatic litigation. There is no international bankruptcy court for countries, so when a government tries to restructure its debt, the pari passu clause can be the main legal tool holdout creditors use to resist.
In the early 2000s, Elliott Associates argued that Peru’s payments to bondholders who accepted a restructuring violated the pari passu clause because Peru was not paying Elliott in proportion. A Belgian appellate court agreed and blocked Peru from making payments through the Euroclear clearing system, forcing a favorable settlement. The highest-profile case followed Argentina’s 2001 default. NML Capital, a hedge fund holding defaulted Argentine bonds purchased at a discount, won injunctions in the Southern District of New York requiring Argentina to make a proportional payment to NML whenever it paid its exchange bondholders. The Second Circuit affirmed in 2012, holding that Argentina’s pari passu clause required equal treatment and that the injunctions did not violate the Foreign Sovereign Immunities Act.6Justia Law. NML Capital, Ltd. v. The Republic of Argentina, No. 12-105 (2d Cir. 2012) Argentina was effectively blocked from paying any bondholders until it paid the holdouts in full, which it did in 2016.
The fallout reshaped sovereign bond drafting. The International Capital Market Association published a revised pari passu clause that explicitly excludes any obligation to pay creditors on a ratable basis, limiting the clause to equal legal ranking. Modern sovereign bonds also routinely include collective action clauses, which let a supermajority of bondholders (typically 75% of a series) approve a restructuring that binds every holder in the series, including those who voted no.
Commercial Real Estate
Commercial mortgage-backed securities regularly use pari passu structures to spread a single large loan across multiple bond pools. A lender originating a $20 million commercial mortgage might split the senior tranche into several notes placed into different CMBS trusts, all carrying equal payment priority. If the underlying borrower defaults, liquidation proceeds flow to those senior notes proportionally regardless of which trust holds them. Pari passu intercreditor agreements govern how one controlling agent manages enforcement and distributes proceeds on a ratable basis to lenders with equal-priority liens.7SEC.gov. Pari Passu Intercreditor Agreement A lender that receives proceeds outside that process must turn them over for proportional distribution.8SEC.gov. Pari Passu Lien Intercreditor Agreement
Venture Capital Liquidation Preferences
Startup financing creates its own version of the pari passu question. When a company is sold or shuts down, investors with preferred stock collect before common shareholders, and the question is how different funding rounds rank against each other. Under a pari passu liquidation preference, investors from all rounds share exit proceeds proportionally based on the capital each invested. If a startup that raised $10 million across three rounds sells for $6 million, every preferred investor receives 60 cents on the dollar.
The alternative is a “stacked” or senior preference structure, where later-round investors collect their full preference before earlier investors see anything. That setup can wipe out early-stage backers in a down exit. Pari passu preferences spread downside risk more evenly and are generally seen as more founder-friendly and more equitable for early investors.
Wills and Estates
Outside finance, the phrase shows up in wills and trusts. When an estate is distributed pari passu, every named beneficiary receives an equal share. A parent leaving assets to three children on a pari passu basis is directing that the estate be divided into three equal portions. If assets fall short of satisfying all bequests, every beneficiary absorbs a proportional reduction rather than one person being paid in full while another gets nothing. The language can reduce the risk of challenges from beneficiaries who feel they were treated unfairly, though it is not a guarantee against disputes. In an estate document, the phrase simply means equal footing among the people named.