Deconstructing the Opacity of Pari Passu Clause as a Pathway to Interpretative Clarity: Guidepost to Optimal Adjudicatory Outcomes

The opacity that underlines the substantive content and interpretation of pari passu clause in financial contracting requires more clarity to ensure predictability for the contracting parties relying on it to access fund in the financial markets. The re-awakening of the contextual and textual controversy that underpins the clause by the NML case has once again re-enacted the divergent positions, namely: the broad or payment interpretation and narrow or equal ranking obligation. Consequently, there is a need for more clarity on the substantive content of the pari passu clause so that contracting parties will not be prejudiced in the event of dispute. Effectively, parties can achieve this by clarifying ex ante the applicable meaning of the clause. The contracting parties may state in the financial contractual agreement that the applicable meaning of the clause is a broad or payment interpretation. Alternatively, the contracting parties may adopt narrow interpretation; or entirely exclude the application of the pari passu clause. Also, parties may need to incorporate collective action clause (CAC) to ensure that the collective decisions of the majority of lenders prevail over undue proclivity for holdouts of the minority. This will dispel the possibility of controversy ex post over rateable payment, while ensuring orderly debt restructuring.