Readers of last month's IFLR will know what the pari
passu clause in debt instruments does not mean. In the
first part of this special report the authors showed why, despite
the recent claims of creditors to the contrary, courts are wrong to
read the clause as saying that borrowers must pay lenders on a
ratable basis even outside bankruptcy. What the clause truly means,
however, is an intriguingly complex issue of its own.
What follows is an investigation into the history of the clause
and how its meaning has changed, sometimes through quite radical
leaps. By hunting down the true meaning of pari passu the
authors aim definitively to put to rest the ratable-payment theory
that has so dangerously gained credence in recent years.
Distinguishing risks to recovery
The pari passu covenant is a contractual provision.
Contract drafters do not usually write into their contracts what
the law already provides. Drafters...