Definition: Pari Passu is a situation where equal rights are shared by different claims. It is a scenario where everyone is favored equally.
What Doea Pari Passu Mean?
Pari Passu is a Latin phrase that means something like “in equal proportion”. It is commonly employed in financial environments to refer to situations where different financial claims are presented. In those cases, the term pari passu will mean that each claim will get equal proportion of the distribution. In liquidation scenarios, this principle is particularly useful since it guarantees the fairness of the procedure. Normally, there are different seniorities in the claims presented.
In each seniority level (for example, bonds have seniority over common stocks) the pari passu principle will indicate that an equal distribution must be given to each of the claims. Stocks are also pari passu instrument, since no individual stock gets a bigger portion than the other, since profits and ownership are equally distributed among them. The term can also be applied to other situations, like for example, a divorce situation where, under normal circumstances, each party will get equal proportion of the whole mutually acquired equity, therefore, a pari passu scenario.
Example
A company called Paper Towels Co. is currently undergoing a bankruptcy procedure. The business is being liquidated and the company owes $350,000 to bondholders, $100,000 to commercial suppliers and $35,000 to a local bank. The liquidators established seniority levels as the following: Bondholders come first, banks come second, commercial suppliers come third and stockholders come last.
After all assets were liquidated there were $500,000 available to be distributed. Each the bondholders, the bank and the suppliers were fully paid, and the remaining $15,000 (an after tax figure) were distributed pari passu within the stockholders.
