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10 Int'l Fin. L. Rev. 11 (1991)
The Pari Passu Clause Sub Specie Aeternitatis

handle is hein.journals/intfinr10 and id is 551 raw text is: The paripassu clause
sub specie aeternitatis
What does aparipassu clause really mean in the context of loans
to sovereign borrowers? Lee C Buchheit of Cleary Gottlieb
Steen & Hamilton, New York explains

There is nothing like a dollop of
Latin to give the legal porridge just
the right consistency. And no banker
worth his or her praecipuum would
ever dream of sending out a
Eurodollar loan agreement which
did not include something called a
pari passu clause. The fact that no
one seems quite sure what the clause
really means, at least in the context
of a loan to a sovereign borrower,
has not stunted its popularity among
drafters of loan agreements and debt
restructuring agreements.
The clause
In most loan agreements or debt
restructuring agreements, the pari
passu clause is mercifully short. A
typical paripassu representation in a
sovereign loan agreement might
Paripassu. The obligations of the
Borrower under this Agreement
rank at least pari passu in right of
payment with all other External
Indebtedness of the Borrower.
This representation is frequently
accompanied by a covenant, in
substantially identical language but
in the future tense, by which the
borrower promises that it will
maintain the pari passu ranking of
the loan with the borrower's other
external indebtedness in the future.
One sometimes encounters an
inquisitive borrower who asks why
this little breeze off the Tiber has
ruffled through the pages of his loan
agreement. This is when the fun
starts. 'It means you can't pay back
somebody else's loan if you're not
then current on your payments under
this loan', is how some bankers may
explain it. 'It means you can't give a
preference to some other creditor
that you are not at the same time
giving to us', will be the interpreta-
tion offered by others. 'Don't worry,
it's standard bumf', the honest few
will say as they quickly flip the page.

In the context of a loan to a
corporate borrower, the lenders'
request for a pari passu warranty is
understandable. In the event of a
bankruptcy or compulsory distribu-
tion of the borrower's assets, the
lenders do not wish to be surprised
by the appearance of other creditors
holding claims against the debtor's
estate that rank senior to their own.
In most jurisdictions, of course, a
debtor cannot subordinate a prior
loan without the express consent of
the creditor concerned. One does
encounter situations in some coun-
tries, however, in which certain
creditors (for example, domestic
creditors) are given a preference in
the bankruptcy of a local company.

In addition, many bankruptcy regim-
es specify that certain types of claims
(such as tax claims or employee
claims for wages) will be given a
priority in bankruptcy by operation
of law. It is not usually thought
necessary to qualify the pari passu
clause in respect of this latter type of
claim because the clause, by its
terms, typically speaks only to the
ranking of the loan in relation to
other Indebtedness or External
Indebtedness (as defined) of the
borrower. Claims which enjoy a
statutory preference in bankruptcy
such as taxes and employee wages
are often not picked up by a standard
definition of Indebtedness or Exter-
nal Indebtedness.

A separate issue relates to the
relevance of the pari passu clause in
the context of the borrower's secured
indebtedness. Secured creditors will,
of course, enjoy a preference in the
bankruptcy of a corporate borrower.
But it is not always clear whether the
phrase'... ranksparipassu in priority
of payment' is intended to refer both
to legally senior obligations of the
kind described above as well as
obligations which enjoy a practical
preference by virtue of the pledge of
collateral security.
Some lawyers (including the au-
thor) believe that the conventional
pari passu clause should not be read
as covering collateral security. It is
for this reason that the clause is often
preceded in the text of a loan
agreement by a 'no liens' representa-
tion (confirming that the borrower
has not previously given security
interests in its assets except for those
identified in a schedule to the
agreement), and followed by a
negative pledge covenant (by which
the .borrower undertakes to give
equal and ratable security to the
lender should it grant a security
interest in the future to some other
creditor). This view is not shared by
all practitioners in the field. To
remove any doubt in the mind of the
reader of the clause on this point,
many pari passu representatives
expressly limit themselves to con-
firming the ranking of the loan in
terms of the borrower's unsecured
Sovereign loans
What makes sense in the context
of a loan to a corporate borrower
does not always make sense, or at
least make the same sense, in the
context of a loan to a sovereign
borrower. Sovereigns are not subject
to domestic bankruptcy regimes nor
is it likely that a sovereign's assets
can be marshalled and distributed to
creditors without the sovereign's
consent. Accordingly, when     a
sovereign promises in a loan agree-
ment that the loan will rank pari
passu with all of the sovereign's other
external indebtedness, the lender is
not being told anything about where
it will stand in a queue of bankruptcy
creditors. In the absence of this
explanation for the presence of the
clause, a goodly number of bankers

International Financial Law Review December 1991


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