Pari passu (Latin: "with equal step") is a clause or principle stipulating that obligations, securities, or claims rank equally in right of payment, without any one taking priority over the others. It appears most often in sovereign and corporate debt instruments, partnership agreements, and insolvency law.
In sovereign bond contracts, a typical pari passu clause promises that the bonds will rank equally with the issuer's other unsecured external indebtedness. For decades the clause was treated as boilerplate, but it became internationally significant in NML Capital v. Republic of Argentina, litigated in the U.S. District Court for the Southern District of New York. Judge Thomas Griesa interpreted the pari passu clause in Argentina's 1994 Fiscal Agency Agreement to mean that Argentina could not pay holders of its restructured (exchange) bonds while refusing to pay holdout creditors who had rejected the 2005 and 2010 restructurings. The Second Circuit affirmed in 2012, and the U.S. Supreme Court declined to hear the appeal in 2014, contributing to Argentina's July 2014 default. The dispute was ultimately settled in 2016 after the Macri government negotiated payment to holdouts.
The Argentina litigation prompted the International Capital Market Association (ICMA) and the IMF to recommend revised model pari passu language in 2014 clarifying that the clause does not require rateable payments, alongside strengthened collective action clauses (CACs) to reduce holdout leverage in future restructurings.
Outside sovereign debt, the principle governs:
- Insolvency distributions, where unsecured creditors in the same class share pro rata in the debtor's estate.
- Syndicated loans, where lenders share recoveries equally.
- Share classes, where holders of the same class receive equal dividends and liquidation proceeds.
For MUN delegates working on sovereign debt restructuring, IMF reform, or vulture-fund regulation, pari passu is a core concept linking contract drafting to systemic financial stability.
Example
In 2012, U.S. Judge Thomas Griesa ruled that Argentina's pari passu clause barred it from paying restructured bondholders while withholding payment from NML Capital and other holdout creditors.
Frequently asked questions
Not inherently. It traditionally meant equal legal ranking, but Judge Griesa's interpretation in the Argentina case extended it to require rateable payment. ICMA's 2014 model clause explicitly rejects that broader reading.
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