Pari Passu Charge

A lender who takes security wants to know where it stands in the queue. Two lenders can both hold a charge over the same factory. Normally one of them ranks ahead of the other.

Sometimes neither will accept second place. Both want the same rank. So the borrower does not create two separate charges. It creates one common charge over the same pool of security, held by both lenders at the same level.

That is a pari passu charge. The Latin means on an equal footing.

The point is what it removes. Without it, the lender who reaches the registry first ranks senior. With it, there is nothing to race for. If the borrower fails, neither lender can be paid ahead of the other out of that security.

Table 6.1, the workbook's Primer on Priority of Debt Claims, builds the idea in four steps.

Step 1 — secured debt is ranked by the charge created. Debt with a first and paramount charge ranks senior-most. Debt with a second charge follows, and so on. Senior or secured debt has priority over all other debt both for receiving interest and for receiving the proceeds of asset sales in insolvency.

Step 2 — same level, multiple lenders. The workbook's sentence is the definition to memorise: when there are multiple lenders requiring the same level of charge, a common charge is created on the same pool of securities, and this is a pari passu charge.

Step 3 — the tie-break it displaces. Where two secured borrowings are charged on the same assets at the same level and are not pari passu, the workbook gives a hard rule: the one registered first becomes senior to the other. A pari passu charge is how lenders avoid that outcome.

Step 4 — the surrounding vocabulary. All of it gets examined together.

No figure attaches to this concept. Table 6.1 carries no threshold, percentage or day count for charges. Rank here is decided by the level of the charge and, failing that, the date of registration — never by an amount.

Vindhya Cement Ltd funds a new grinding unit. Illustrative rupee figures.

The three banks would each have wanted a first charge, and separate first charges of the same level would have been settled by registration date. So one common first charge was created over the same pool in favour of all three.

Vindhya defaults. The plant and land realise Rs 300 crore.

First-charge pool  : three banks, Rs 400 crore owed, Rs 300 crore available
                     none of the three is paid ahead of the others out of it
Second charge      : the AIF recovers from this asset only after the
                     first charge is satisfied in full  ->  nothing here

The AIF is not unsecured — it holds a real second charge and can still look to any asset the first charge does not cover. But on this pool it ranks behind.

Separately, the working capital bankers' floating charge over stock and receivables does not bite until it is crystallised. If a fixed charge already sits on the same stock, the fixed charge takes priority once crystallisation happens.

Chapter 6 (Risk and Return — Investor and Fund Perspective), section 6.2 on debt investments, and Table 6.1 in particular. The phrase appears exactly once, as a one-line definition inside a dense table, which is precisely the shape it is examined in: when multiple lenders require the same level of charge, the common charge created on the same pool of securities is called ______.

Learn Table 6.1 as a vocabulary list, because the paper tests the words against each other: security creation, lien, general lien, first and paramount charge, second charge, fixed charge, floating charge, pari passu charge, sub-ordinate debt and unsecured debt. Chapter 8's fund due diligence questionnaire then asks a debt fund to describe the security structure for all the deals: senior/ junior, security cover, cash escrow — the same ideas on the investor side.

• Three different pages carry this Latin phrase, and they are three unrelated tests. This one is a lender's charge. The published Pari passu page is a corporate-action date — when newly issued shares begin to rank equally with a company's existing shares. Pari-passu rights is an AIF rule about differential rights offered to select investors. If a question is about shares or about investor rights, it is not this page.
• A pari passu charge equalises rank; it does not create seniority. Three lenders can be pari passu on a second charge, in which case all three are still sub-ordinate debt.
• Registration order decides rank only between separate charges at the same level. A pari passu charge is what takes that race away. Candidates often reverse this and say registration order decides a pari passu charge.
• Floating does not beat fixed. On crystallisation, an existing fixed charge on the same assets takes priority over the floating charge.
• A general lien ranks lower than a specific charge, and a lien can arise by law without any documentation, unlike security creation.