Pari passu clause
The pari passu ( latin pari passu , "in the same step"; equal rank declaration ) is an agreement in the form of a clause in bond conditions or in credit contracts , the current to the DC rank and future unsecured claims against a debtor pathway. It is one of the non-financial covenants . Pari-passu clauses are widespread internationally, but can have different effects or no effects at all, depending on the legal system involved.
Starting position
If the debtor is solvent, all due and enforceable claims can be serviced by the debtor. If the debtor does not pay, the obligee can enforce his claim through legal action.
In the event of the debtor's bankruptcy, however, his assets are usually insufficient to service all claims. While secured creditors are regularly privileged by their security (in German law through the right to separate in insolvency, §§ 49 - 52 InsO), unsecured creditors have to share the remaining insolvency assets among themselves and waive part of their claims. In most legal systems, the satisfaction of insolvency creditors takes place according to a hierarchy (in Germany cf. §§ 38–39 InsO) with the stipulation that subordinate insolvency creditors are only satisfied when the senior insolvency creditors have been fully satisfied.
Unsecured creditors are interested in being served and treated equally by the debtor. This interest is derived from the principle par conditio creditorum , which demands equal treatment of creditors.
To this end, the Pari-Passu clause is intended to ensure that the claims of the creditors are on an equal footing with other current or future unsecured liabilities of the debtor. The Pari-Passu clause is an obligation under the law of obligations on the part of the borrower, with which the borrower guarantees a legal status that should not guarantee any other unsecured liabilities with priority over the debtor's claim during the term of the liabilities.
The Pari-Passu clause is one of the standard clauses of all loan agreements and syndicated loans , especially in international credit transactions, based on the contract models developed by the LMA .
content
If a debtor now receives credit from different creditors without the provision of collateral, each creditor must ensure in his credit agreements that there is no hierarchy between the unsecured creditors. Therefore, the clause aims to clarify that a particular unsecured debt equal rank ( English "rank at least" should have) with all previously incurred and all future still to be incurred, unsecured creditor claims.
In particular, the clause aims to ensure that, in the event of bankruptcy , the claims of the lender have the same rank as all other existing and future unsecured claims of other creditors . This presupposes that such a contractual determination of precedence in the respective legal system does not encounter obstacles under insolvency law. In German insolvency law, the debtor cannot give individual creditors priority in bankruptcy. In principle, all bankruptcy creditors have the same rank. Only the agreement of subordinate status in accordance with Section 39 (2) InsO is possible. It can therefore be argued with some justification that the Pari-Passu clause is in principle superfluous for debtors based in Germany.
There remains the risk that the debtor will grant security interests in favor of other creditors to objects that were previously available to satisfy the unsecured creditors. This risk is to be contained by negative declarations.
scope
The main purpose of granting a certain rank is to determine from the outset the legal position of the creditors vis-à-vis third-party creditors in the satisfaction of their liabilities in the debtor's insolvency proceedings. However, the Pari-Passu clause should not only take effect when the debtor becomes insolvent. Rather, it is intended to ensure that the debtor serves the creditors benefiting from the clause equally when it comes to interest and principal payments, i.e. not giving preference to any creditor - for example if liquidity is scarce . Therefore, the clause covers all unsecured claims, regardless of which creditor they come from and what maturity they have. The debtor undertakes not to enter into any other obligation that takes precedence over the debt benefiting from the clause.
“The scope of the scope of application of the Pari-Passu clauses can, however, be limited by ensuring that the guaranteed pari passu applies only to certain types of liabilities of the issuer, such as unsecured and unsubordinated foreign currency liabilities”. If certain liabilities are classified as subordinate , the liabilities benefiting from the Pari-Passu clause are given priority. When systematising bonds or liabilities in general, a distinction must be made as to whether they are subject to a certain ranking. According to this, a distinction is made between senior liabilities, liabilities with the same ranking according to the Pari-Passu clause and subordinated liabilities. These three categories have a direct impact on the repayment sequence. First the senior debts are serviced, then the pari passu debts and only then the subordinated debts.
In addition, the clause can only establish the same ranking as the debtor's liabilities that are not privileged by the law in insolvency, so that the clause does not change the legally stipulated ranking in insolvency proceedings. The clause can therefore not override the statutory privilege of certain claims in insolvency, provided there are such statutory hierarchies.
Government bonds with pari passu clauses
At the latest since the moratorium of the Republic of Argentina in December 2001 on certain bonds with a pari-passu clause , a discussion has arisen about this clause, at least with regard to its significance for government bonds.
In the case of government bonds, too, it was and is still customary to place unsecured bondholders on an equal footing with a pari-passu clause . In section 8 (1) sentence 1 of the loan terms and conditions for bonds of the Republic of Argentina, it was generally referred to, without any restriction on certain types of liabilities, that the republic was dealing with “non-subordinate obligations”. Section 8 (1) sentence 2 of the bond terms and conditions additionally assured that the bond liabilities always rank with other unsecured and unsubordinated foreign liabilities within the meaning of Section 8 (4) of the bond terms and conditions. While the bondholders benefiting from the clause did not receive any interest payments on the due date, Argentina continued to serve the IMF, although it was not formally among the senior creditors. Therefore, suits are pending by bondholders for breach of the bond terms and conditions.
However, loans from the World Bank , the IMF or other supranational organizations are generally serviced by the debtor countries. The reasons lie in particular in the concern of the debtor countries that a breach of the credit obligation towards the World Bank or the IMF could result in particularly profound damage to international creditworthiness and would result in far-reaching sanctions. In addition, it is hoped that the multilateral financial institutions will provide further loans, which can be promoted through loan servicing. For some voices in the literature it is undisputed that multilateral lenders enjoy preferential creditor status. The Federal Ministry for Economic Cooperation and Development confirmed this legal opinion, according to which the demands of the international organizations “as well as those relating to loans with extended repayment periods or short-term loans are not dealt with in the Paris Club. They are to be operated with priority ... ". Since insolvency proceedings do not exist for states as debtors ( national bankruptcy ), it remains to be seen whether the Pari-Passu clause can even be applied and enforced for government bonds.
Event for a pari passu clause
If, after submitting a pari passu clause , the debtor intends to provide another creditor with security or to give his claim priority, this is considered a breach of the previously submitted pari passu clause . The pari passu with later creditors is broken if they receive a security that would privilege them in the insolvency or if they were given priority with consequences for the order of interest and repayment. In this case, Pari-Passu clauses also provide for assurances by the debtor to offer the creditors benefiting from the clause equivalent collateral in order not to deteriorate their ranking. This is where the transition to the negative declaration begins, which is intended to prevent collateral that discriminates against unsecured creditors.
See also
Individual evidence
- ↑ Mauricio Hartwig-Jacob, The contractual relationships and the rights of investors in international bond issues , 2001, p. 512
- ↑ Mauricio Hartwig-Jacob, The contractual relationships and the rights of investors in international bond issues , 2001, p. 513
- ↑ Mauricio Hartwig-Jacob, The contractual relationships and the rights of investors in international bond issues , 2001, p. 511
- ↑ Winfried Stadler, Die neue Unternehmensfinanzierung , 2004, p. 137
- ^ Norbert Horn, The Law of International Bonds , 1972, p. 305
- ↑ Mauricio Hartwig-Jacob, The contractual relationships and the rights of investors in international bond issues , 2001, p. 514
- ^ Richard Wright / Warren Cook / Richard Gray, The LST's Complete Credit Agreement Guide , 2009, p. 268
- ↑ Dorothee Einsele, Banking and Capital Markets Law: National and International Banking Transactions , 2006, p. 101, footnote 112
- ^ Norbert Horn, Legal Issues International Debt Rescheduling , in: Wertpapier-Mitteilungen dated June 2, 1984, p. 716
- ^ Norbert Horn, Legal Issues International Debt Rescheduling , in: Wertpapier-Mitteilungen dated June 2, 1984, p. 716
- ↑ Gintaras Shlizhyus: Argentina's debt restructuring , in: Argentina Special Focus, Raiffeisen Research, January 2004, p. 8
- ↑ Federal Ministry for Economic Cooperation and Development: International Insolvency Regulations for Developing Countries , Position of the Scientific Advisory Board at the BMZ (BMZ Special No. 014), May 2000, Bonn: BMZ (AG1-14 / 91)
