What Is The Pari Passu Principle? (2026 Updated)

If you’ve ever skimmed a finance document, a shareholder arrangement, or an insolvency update and seen the words pari passu, you’re not alone in thinking, “Okay… but what does that actually mean for my business?”

In plain English, the pari passu principle is about equal ranking. It’s a common concept in lending, insolvency, and commercial contracts, and it can affect who gets paid first (and who doesn’t) if things go wrong.

This guide is current and reflects how the term is typically used in New Zealand commercial practice today. By the end, you’ll understand what pari passu means, when it matters, and how to avoid nasty surprises when you sign something that includes it.

What Is The Pari Passu Principle In Plain English?

Pari passu is a Latin phrase that basically means “on equal footing” or “in equal proportion”.

In a legal or commercial context, the pari passu principle usually means one of the following:

• Two or more debts rank equally (neither creditor has priority over the other); or
• Payments are shared proportionally among creditors within the same ranking group (often seen in insolvency); or
• One party promises not to give another creditor better priority than the creditor benefiting from the pari passu clause (common in loan agreements).

A simple way to think about it is:

If there’s a limited “pie” of assets or money to go around, pari passu aims to stop one person in the same group from taking a bigger slice just because they got there first.

Why Do Business Owners See Pari Passu So Often?

You’ll most commonly see pari passu in:

• loan agreements and funding documents
• terms for bonds or notes
• security arrangements
• some supplier or trade credit arrangements (less common, but it happens)
• insolvency discussions and creditor updates

It’s not “just legal Latin”. In the right (or wrong) circumstances, it can influence your business’s options when negotiating funding, giving security, restructuring, or exiting a deal.

If you want a quick definition-style breakdown as well, this explanation of Pari Passu is a handy reference point.

Where Does The Pari Passu Principle Show Up In Real Business Documents?

Pari passu shows up in two main ways: (1) as a ranking concept and (2) as a contractual promise.

1) In Loan Agreements And Funding Terms

In loan documents, a pari passu clause often says something like:

• the borrower’s obligations under the loan rank at least equally with all other unsecured and unsubordinated obligations; and/or
• the borrower won’t create a security interest that ranks ahead of this lender (or if they do, they must offer equivalent security to this lender too).

Practically, that can constrain your ability to:

• take on new funding later
• give security to another lender
• restructure debts in a way that disadvantages one lender

Depending on how it’s drafted, it can overlap with “negative pledge” style protections (even if those exact words aren’t used).

2) In Security Arrangements

If your business gives a lender security, that security may affect ranking. A lender with security often has priority over unsecured creditors to the extent of that security.

This is where it’s important to understand what you’re signing when you grant security over business assets, such as under a General Security Agreement.

Even if multiple secured parties exist, the documents (and registration details) determine whether they rank equally, or whether one sits ahead of the other.

3) In Company And Investor Arrangements

Pari passu can also appear in:

• preference share terms
• convertible notes
• cap table documents and side letters
• some shareholder funding structures

For example, a term might say certain shares rank pari passu for dividends or distributions.

If you’re managing multiple owners, investor rights, or different share classes, you’ll usually want these ranking concepts to align with the rules in your Company Constitution and any Shareholders Agreement.

How Does Pari Passu Work In New Zealand Insolvency (And Why It Matters)?

When people talk about pari passu “as a principle”, they’re often referring to insolvency outcomes: what happens when a company can’t pay its debts and assets are distributed.

In many insolvency situations, unsecured creditors of the same class are generally treated equally and share in distributions proportionally. That’s the pari passu idea in action.

But (and this is the part that trips people up) pari passu doesn’t mean “everyone gets paid equally no matter what.” In the real world, insolvency is often about ranking and priorities.

A Simple Insolvency Example

Imagine a company has:

• $100,000 in total assets available to distribute, and
• $500,000 owing to various creditors.

If three unsecured creditors are all in the same ranking group (and there are no other priority issues affecting them), then they may be paid pari passu, meaning each receives a proportional share based on what they’re owed.

For example:

• Creditor A is owed $100,000
• Creditor B is owed $200,000
• Creditor C is owed $200,000

If $100,000 is available to unsecured creditors, the distribution might be proportional:

• A receives 20% of the pool ($20,000)
• B receives 40% of the pool ($40,000)
• C receives 40% of the pool ($40,000)

That’s the “equal footing” idea: no one in the same group jumps the queue.

Why This Matters Even If You’re Not “In Insolvency”

Most business owners aren’t planning for insolvency (fair enough). But understanding pari passu can still help you:

• evaluate the real risk of offering trade credit to customers
• decide whether you should ask for security (and what kind)
• negotiate funding terms with lenders
• structure director/shareholder loans sensibly

In other words: it’s part of getting your legal foundations right from day one, not just “end of the road” stuff.

When Pari Passu Does Not Mean Everyone Is Equal

Here’s the key takeaway: pari passu usually applies within a category. If someone is in a different category (for example, secured vs unsecured), then they’re not necessarily “equal” at all.

There are also plenty of situations where the law or a contract changes the usual “equal footing” outcome.

1) Secured Creditors Often Rank Ahead

If a creditor holds valid security over certain assets, they may get paid from those assets before unsecured creditors see anything.

That’s why a lender might insist on a security package, and why directors and founders should be cautious about what’s being secured (and how broadly).

2) Certain Claims Can Have Statutory Priority

In insolvency, some claims may be treated as preferential under New Zealand law (for example, certain employee entitlements or tax-related amounts in some cases). This can affect what’s left for unsecured creditors who would otherwise share pari passu.

The practical point is: even if you’re “an unsecured creditor”, you may not be on equal footing with every other unsecured creditor if the law creates sub-groups or priorities.

3) Subordination Changes The Ranking

A debt can be subordinated by contract. That means one creditor agrees (or is forced by contract terms) to rank behind another.

You might see this where:

• shareholder loans are subordinated to bank lending
• investors agree to rank behind a senior lender
• a group company loan is subordinated under an intercompany structure

This is a good example of why “pari passu” can’t be read in isolation. You always need to look at the broader set of terms.

4) Set-Off And Netting Can Affect “Equal Sharing”

If two parties owe each other money (for example, a supplier and customer relationship with credits and invoices going both ways), set-off rights can effectively change the pool of money available for distribution.

That can lead to outcomes that feel unequal, even if the remaining unsecured creditors still share pari passu among themselves.

5) Personal Guarantees Can Shift Real-World Risk

Even if creditors rank pari passu against the company, a personal guarantee can change the practical outcome because the creditor can pursue the guarantor personally (subject to the guarantee terms and any applicable defences).

This often comes up when directors sign a Deed of Guarantee and Indemnity (or similar guarantee wording inside a supply or finance agreement).

So, pari passu might answer “who gets paid from the company’s remaining assets,” but it doesn’t necessarily answer “who carries the loss overall.”

How Should You Use Pari Passu When Negotiating Contracts Or Funding?

If you’re negotiating a loan, investment, or major supply arrangement, a pari passu clause can be completely normal. The risk usually isn’t the concept itself - it’s signing something you haven’t pressure-tested against how your business actually operates.

Below are practical steps you can take to stay protected.

1) Work Out What The Clause Is Trying To Protect

Ask yourself: is the clause meant to protect the other party from you doing something like:

• granting later security to another lender
• preferring a related party debt
• structuring a new entity that pushes assets away from creditors

Once you understand the “why”, you can negotiate something that’s fair without boxing your business in.

2) Check Whether It’s A Ranking Statement Or An Operational Restriction

Some pari passu clauses are essentially descriptive (a statement about how the debt ranks). Others act more like a restriction on what you can do later.

For example, if the clause says you must ensure the lender ranks at least equally with “all present and future unsecured obligations”, you’ll want to consider:

• how that interacts with future fundraising
• whether it blocks normal working capital finance
• whether you might accidentally breach it by giving security elsewhere

3) Make Sure Your Security And Priority Terms Are Consistent

A common issue is when:

• the loan agreement says one thing about ranking (pari passu), but
• the security documents (and registration details) create a different practical ranking.

This is where it helps to have the full suite reviewed together, rather than document-by-document.

4) Be Careful With “Boilerplate” Amendments

Businesses often evolve, and you may need to update funding terms or restructure debts. If you’re changing a contract, it’s worth documenting it properly (and not relying on informal email threads that don’t match the original agreement requirements).

In many cases, a Deed of Variation is the cleanest way to change repayment terms, ranking clauses, or security-related promises while keeping the rest of the agreement intact.

5) Consider The Wider Risk Management Picture

Pari passu clauses are usually part of a bigger risk allocation system in your contracts.

For example, you might also need to think about:

• who bears loss if something goes wrong
• whether your contracts cap damages
• what happens if a party can’t perform

This is where clauses dealing with risk allocation, including Limitation of Liability, can matter just as much as ranking language, depending on the deal.

6) If You’re Raising Capital, Align Debt And Equity Terms Early

Founders sometimes raise capital using a mix of instruments (equity, convertible notes, SAFEs, shareholder loans). That’s normal - but the ranking and conversion mechanics need to be consistent, especially if you plan to raise again later.

If you’re using startup-style instruments, you’ll want to be confident how they interact with each other on a downside scenario and on an exit scenario. For example, a SAFE note approach can be efficient, but you still need clarity on what the investor receives and when.

Key Takeaways

• Pari passu means “on equal footing” and usually relates to equal ranking or proportional sharing, especially in lending and insolvency contexts.
• In contracts, a pari passu clause may be more than a definition - it can also act as a restriction that affects your ability to take on future debt or give security.
• Pari passu does not mean everyone is treated equally in every situation; secured creditors, statutory priorities, and subordination arrangements can change the outcome.
• If your business signs funding or supply terms with ranking language, it’s important to check how it aligns with your security documents and your broader commercial arrangements.
• When your business changes (new finance, restructure, investor entry), update key documents properly (often via a deed) so your obligations stay clear and enforceable.
• Getting advice early can save you major headaches later - especially where ranking terms, guarantees, and security interests are involved.

If you’d like help reviewing a contract with a pari passu clause, negotiating funding terms, or making sure your business is protected from day one, you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.