A pari passu security agreement is a type of legal document that outlines the equal rights of creditors in case of default or bankruptcy. In other words, if a borrower defaults on a loan, the pari passu security agreement ensures that all creditors will be treated equally and receive their share of the collateral.
The term “pari passu” comes from Latin, meaning “equal footing” or “on equal terms.” In the context of a security agreement, it means that all creditors have the same level of rights to the assets used as collateral for a loan.
A pari passu security agreement is often used in situations where there are multiple lenders or creditors involved in a loan. For example, if a company takes out a loan from two different banks, both banks may require a pari passu security agreement to ensure their equal rights to the collateral.
The agreement typically includes a detailed description of the collateral, such as real estate, equipment, or inventory, and outlines how the collateral will be distributed among the creditors in case of default. It may also include provisions for how disputes between the creditors will be resolved and how any remaining assets will be distributed.
Pari passu security agreements can be a valuable tool for lenders and creditors, as they provide a clear and fair system for distributing collateral in case of default. However, it`s important to note that these agreements can be complex and require careful negotiation and drafting. Additionally, borrowers should be aware of the potential implications of signing a pari passu security agreement, as it can limit their ability to use the collateral for other purposes or secure additional loans.
In conclusion, a pari passu security agreement is a legal document that establishes the equal rights of creditors in case of default or bankruptcy. It provides a clear system for distributing collateral among multiple lenders or creditors and can be a valuable tool for managing risk in lending. However, borrowers should be aware of the potential implications and seek professional guidance when negotiating and signing such agreements.