What Is Pari Passu? Meaning and Pari Passu Charge

By Markets & Investing DeskUpdated Nov 10, 2026

Definition

Pari passu, Latin for "with equal step," means two or more claims or securities rank equally, so none is paid ahead of the others and any shortfall is shared.

Key takeaways

Pari passu applies within a creditor class, so two unsecured lenders rank equally but shareholders rank behind creditors.
With a first pari passu charge, lenders share sale proceeds in proportion to what each is owed, with no one paid first.
Pari passu decides who ranks where, while pro rata decides how money is split among claims of equal rank.
Parity bonds can carry different coupons, maturities and covenants while still sharing the same payment priority.

Pari passu is Latin for “with equal step,” usually rendered as “on equal footing.” In finance it means two or more claims, securities or obligations rank equally, so none is paid ahead of the others. When there is not enough money to pay everyone in a pari passu group in full, the shortfall is shared, with each holder recovering the same percentage of what it is owed.

What Pari Passu Means in Finance

A pari passu provision tells you where a claim sits in the line for payment. If Bond A and Bond B are pari passu, neither can be paid in preference to the other. The issuer cannot pay A in full and leave B with nothing. A pari passu clause in a loan or bond also typically commits the borrower not to create future debt that ranks ahead of the existing obligation unless the documents allow it.

How Pari Passu Works

Equity shares

When a company sells additional shares in a secondary offering, the documents often state that the new shares “shall rank pari passu” with existing shares of the same class. That wording means the new shares carry the same rights to dividends, voting and any surplus on liquidation as the old ones.

Creditors

Pari passu applies within a creditor class, not across the whole capital structure. A company’s obligations follow a ranking: secured creditors are paid from the collateral that backs their loans, unsecured creditors come next, subordinated lenders follow, and shareholders sit at the bottom. Creditors and shareholders are therefore not pari passu, because creditors are paid first. Two unsecured lenders, however, usually are pari passu with each other, as are two lenders holding the same lien on the same asset.

Preferred and common stock

Preferred stock normally ranks ahead of common stock for dividends and for payouts when a company is dissolved. A new series of stock is described as pari passu with an existing preferred series if it ranks equally with that series for both dividends and liquidation proceeds. If it ranks ahead, it is senior. If it ranks behind, it is junior.

Wills and trusts

A will or trust can specify that named beneficiaries share assets pari passu, which in this context generally means each receives an equal portion. Where gifts must be reduced because the estate is too small, a pari passu instruction spreads the reduction evenly rather than favoring one gift.

Parity bonds

A parity bond is a bond issue with the same claim to payment as other bonds already issued against the same source. Unsecured bonds of an issuer can be parity bonds with each other: no bond’s coupon has priority over another’s. Secured bonds can be parity bonds with other bonds secured by the same pledge. Municipal finance uses the term frequently, often for bonds that share a claim on the same pledged revenue stream.

The opposite arrangement pairs a senior (first) lien bond with a junior (subordinate) lien bond, whose claim on the pledged revenue ranks behind the senior bond’s claim.

What Is a Pari Passu Charge?

A charge is a security interest a borrower creates over an asset in favor of a lender. A pari passu charge is a charge over the same asset held by two or more lenders who rank equally. If the borrower defaults and the asset is sold, the lenders share the proceeds in proportion to the amounts owed to each, with none taking first slice.

The term is common in syndicated and consortium lending, especially in Indian corporate finance. There, a company may give a “first pari passu charge” over its plant and machinery to several banks, or a “second pari passu charge” that ranks behind the first-charge holders but equally among the second-charge lenders themselves. Admitting a new lender to an existing charge generally requires the existing holders’ consent, because it dilutes their share of the collateral.

Hypothetical example. A manufacturer borrows $6 million from Bank A and $4 million from Bank B, giving both a first pari passu charge on its factory. The company defaults, and the factory sells for $8 million after costs. The banks are owed $10 million combined, so each recovers 80%: Bank A receives $4.8 million and Bank B receives $3.2 million. Had Bank A held an exclusive first charge instead, it would have been repaid its full $6 million, leaving $2 million for Bank B.

A pari passu charge differs from an exclusive charge, where one lender alone has rights over the asset, and from a subservient charge, which ranks below existing charges.

Pari Passu and Unsecured Debt

Pari passu comes up most often with unsecured debt. Unsecured lenders have no collateral, which leaves them more exposed if the borrower defaults or files for bankruptcy, so their protection comes from contract terms.

Two terms usually work together:

Pari passu clause: the debt will rank at least equally with the borrower’s other unsecured, unsubordinated debt.
Negative pledge: the borrower will not pledge assets to secure other debt, which would push the unsecured lender down the line.

The pari passu clause in sovereign debt

Governments cannot be liquidated, so the meaning of a pari passu clause in sovereign bonds has been contested in court. In the litigation between holdout creditors and Argentina, U.S. courts read the clause to bar the country from paying holders of restructured bonds while refusing to pay the holdouts. That interpretation, treating the clause as requiring ratable payment rather than only equal legal ranking, prompted many sovereign issuers to rewrite pari passu language in newer bond contracts to state explicitly that it does not require proportional payment.

Pari Passu vs. Pro Rata

Pro rata means “in proportion”: dividing something according to each party’s share.

The two terms answer different questions:

Pari passu answers who ranks where. Claims of equal seniority stand together.
Pro rata answers how the money is divided among claims that share a rank.

They often appear together because equal standing, applied to unequal claims, produces a proportional result. Suppose a debtor owes Creditor 1 $10,000 and Creditor 2 $5,000, and only $6,000 is available. If the debts are pari passu, splitting $3,000 each would favor the smaller creditor. The equitable division is pro rata: Creditor 1 receives $4,000 and Creditor 2 receives $2,000. Each recovers 40% and absorbs a 60% loss.

The terms can also diverge. Pro rata applies outside any ranking question, such as a pro rata dividend or share of fees. And a pari passu creditor can still lose the pro rata outcome if a court or contract allows other payments first.

Example: Parity Bonds and Coupons

Equal ranking does not mean equal terms. Consider an issuer with outstanding $1,000 bonds paying a 7% coupon, or $70 a year, that later issues $1,000 parity bonds with a 5% coupon, paying $50 a year. The bondholders expect different cash, but they share priority: neither issue’s interest has to be paid before the other’s, and in a default both stand in the same position against the issuer. Pari passu bonds can likewise differ on maturity, call features and covenants while still ranking equally for payment.

Limitations of Pari Passu

It is only as broad as the class. Equal ranking among unsecured lenders does nothing to move them ahead of secured creditors, and structurally subordinated debt (owed by a holding company rather than the subsidiary that owns the assets) can sit behind pari passu claims at the operating level.
Wording governs. “Ranks pari passu” may cover payment priority in one contract and only legal ranking in another, as the sovereign debt cases show.
Partial equality. Items can be equal in one respect and not another, such as common shares with equal dividend rights but different voting rights.

Senior and subordinated: describe ranking above or below, the opposite of pari passu.
Cross default: a clause making a default on one debt a default on others. It concerns triggers, not ranking.

FAQs

What does pari passu mean in commercial real estate?

In commercial real estate, pari passu usually describes investors who share in distributions in proportion to the capital each contributed, with no investor class receiving a preferred return first. It also describes large commercial mortgage loans split into notes of equal priority that are held by different lenders or securitizations.

How is pari passu pronounced?

It is commonly pronounced "PAR-ee PASS-oo" in English.

The Bottom Line

Lenders, bondholders and shareholders should read pari passu wording closely, because it fixes where a claim stands when money runs short. Equal ranking protects a holder only against others in the same class and gives no advantage over secured or senior creditors. The exact contract language matters, as the Argentina litigation showed when courts read the clause to require ratable payment.