What Is The Pari Passu Principle?

If you’ve ever dealt with a business that’s gone into liquidation or you’ve supplied goods on credit, you may have come across the phrase “pari passu”. It’s Latin for “on equal footing”, and in Australian insolvency law it’s a foundational idea that shapes who gets paid, when, and how much.

Understanding the pari passu principle helps you plan for risk, negotiate better terms, and protect your position if one of your customers runs into trouble. In this guide, we’ll break down what it means in plain English, when it applies, where the exceptions are, and the practical steps you can take to avoid being left at the back of the queue.

Let’s unpack the concept and look at how you can use smart contracts and security to improve your outcome if a worst‑case scenario occurs.

What Does Pari Passu Mean In Australian Law?

Pari passu means creditors of the same rank share in an insolvent estate equally and proportionally. In other words, if a company or individual doesn’t have enough assets to pay everyone in full, creditors who sit in the same category take a “rateable” slice of whatever is available.

In corporate insolvency, the principle is the default rule for unsecured creditors. After the costs of the insolvency and certain statutory priorities are paid, what’s left is distributed among unsecured creditors in proportion to what they’re owed. The pari passu rule aims to promote fairness and certainty by treating like creditors alike.

It’s important to remember this is a default position. Australian law (and the parties’ contracts) create well‑known exceptions that change who gets paid before whom.

When Does Pari Passu Apply In Practice?

1) Liquidation Of A Company

When a company is wound up, a liquidator gathers and realises assets, then distributes proceeds according to the Corporations Act. Once priority payments are handled (more on these below), unsecured creditors rank pari passu and receive cents‑in‑the‑dollar based on the size of their admitted debts.

2) Voluntary Administration And Deeds (DOCAs)

During voluntary administration, distributions are typically governed by a Deed of Company Arrangement (DOCA) agreed by creditors. A DOCA can modify the usual order, but when it provides for a pool to be shared by unsecured creditors, they usually share pari passu unless the deed sets a different priority.

3) Bankruptcy Of An Individual

In personal insolvency (bankruptcy), unsecured creditors also share pari passu in the divisible property after prescribed costs and priorities are met. The idea remains the same: creditors of equal rank should be treated equally.

4) Within A Class Of Shares Or Debentures

Outside insolvency, you’ll also see “pari passu” to describe equal ranking within the same class of securities (for example, all ordinary shares rank pari passu for dividends).

Key Exceptions And Limitations You Should Know

Pari passu doesn’t mean everyone always shares equally. Several rules override it and put some parties ahead of general unsecured creditors.

Secured Creditors (Personal Property Securities Act)

Creditors with valid security interests over a company’s assets are paid from those assets first, before unsecured creditors. If you supply goods, lend money or lease equipment, you can often take security over personal property and register it on the Personal Property Securities Register (PPSR). If properly perfected, your security generally beats unsecured claims and can even outrank later competing security.

To understand the register and why it matters, it’s worth reading about what the PPSR is and how PPSR protection works for businesses.

Statutory Priorities

Before unsecured creditors share pari passu, the insolvency practitioner’s costs and expenses are paid, followed by certain priority claims. Employee entitlements (like wages and superannuation) sit high on this list. These statutory priorities reduce the pool available to general unsecured creditors.

Contractual Subordination And Intercreditor Agreements

Creditors can contract out of equal ranking among themselves. For example, junior lenders may agree to be paid after senior lenders via a subordination or intercreditor deed. These contracts alter the order and timing of distributions among consenting creditors, displacing pari passu within that group.

Set‑Off

In some circumstances, if you and the insolvent company owe each other money, netting or set‑off rules can reduce your exposure, effectively changing your position compared to other creditors. Robust set‑off clauses in commercial contracts can help preserve that right (subject to insolvency laws).

Trust Property

If a company was holding assets on trust, those assets are generally not available to satisfy the company’s own creditors. They’re applied to trust creditors first according to trust law principles, so the pari passu pool for general company creditors may be smaller.

Retention Of Title (ROT) And Other Proprietary Rights

Suppliers often include ROT clauses so ownership stays with them until paid in full. Under the PPSA, most ROT arrangements are treated as security interests and should be perfected on the PPSR. Properly structured, these rights can put you ahead of unsecured creditors.

How Can You Improve Your Position As A Creditor Or Supplier?

While pari passu sets a fair default, your business doesn’t have to rely on it. With smart planning and the right documents, you can move up the priority ladder and manage your risk.

1) Take Security Over Assets

Where appropriate, ask for a security interest and document it in a General Security Agreement or a specific asset security. Then, lodge it promptly - delays can be costly. If you want hands‑on support, our team can help you register a security interest correctly and on time.

2) Register On The PPSR

Registration is crucial to perfect your interest and ensure you outrank later unsecured creditors (and often later secured creditors). If you supply on ROT, lease goods, or provide credit, make PPSR registration part of your onboarding checklist.

3) Use Personal Guarantees

If you’re dealing with a company with minimal assets, consider a director or parent‑company guarantee. A guarantee gives you recourse beyond the debtor entity and can encourage on‑time payment. Learn more about the risks and benefits of personal guarantees in Australia, or get a tailored Deed of Guarantee and Indemnity put in place.

4) Ask For A Bank Guarantee Or Cash Security

For larger contracts, bank guarantees or cash bonds can provide immediate recourse if payment issues arise. Our overview of bank guarantees explains how they work in practice.

5) Set Clear Credit Policies

Implement credit checks, caps and staged payments. Tighten terms for higher‑risk customers and consider upfront deposits or progress payments to reduce your exposure if insolvency hits.

6) Monitor Solvency Early

Watch for red flags (late payments, changing staff, supply chain issues). If you’re concerned, adjust terms or require security. Directors must consider solvency too - for context, company boards periodically pass a solvency resolution - so a frank conversation may be appropriate.

Practical Examples Of Pari Passu In Action

Example 1: Unsecured Trade Creditors In A Liquidation

You supplied $100,000 of goods to a customer on 30‑day terms with no security, and another supplier is owed $50,000. After paying the liquidator’s costs and employee entitlements, there’s a $30,000 pool for unsecured creditors. Under the pari passu rule, you’d get two‑thirds ($20,000) and the other supplier one‑third ($10,000), because distributions are proportional to the admitted debts.

Example 2: Supplier With PPSR‑Perfected ROT

Same facts, but this time your terms include an ROT clause and you registered a purchase money security interest (PMSI) on the PPSR within time. You’re now a secured creditor over the supplied inventory or its proceeds (if properly traced). You’re paid first from those assets, potentially in full, before the unsecured pool is shared pari passu among others.

Example 3: Senior And Mezzanine Lenders

A business has both a senior lender and a mezzanine lender. Under an intercreditor deed, the mezzanine lender agrees to rank behind the senior lender. Even if both hold security, contractual subordination means the senior lender gets paid first from the secured assets. Pari passu only applies within the same ranking group unless altered by agreement.

Example 4: Set‑Off In Action

You owe your customer $15,000 for services, and they owe you $20,000 for goods. When they enter insolvency, legally enforceable set‑off can sometimes reduce your exposure to the net $5,000, leaving you in a better position than other unsecured creditors who must share pari passu without any netting.

What Legal Documents Can Help?

If you sell goods or services on credit, or you’re lending funds, the right paperwork can shift you from the general unsecured pool to a more protected position. Consider the following:

• General Security Agreement (GSA): Grants security over all or specific assets of the debtor so you rank ahead of unsecured creditors. A GSA should be paired with PPSR registration. You can secure your interests using a General Security Agreement.
• Credit Application Terms/Terms of Trade: Sets your payment terms, late fees, security/ROT, set‑off and enforcement rights. Strong boilerplate here makes collections much easier. If you’re formalising your onboarding, consider comprehensive credit application terms.
• Sale Of Goods/Service Terms: Core contract with ROT, PPSR consent, warranties, delivery and risk clauses. Tailor for your industry and supply model. See our Sale of Goods Terms or our broader Goods & Services Agreement options.
• Deed Of Guarantee And Indemnity: Personal or related‑entity guarantees improve recovery prospects if the debtor company has limited assets. A tailored Deed of Guarantee and Indemnity can be required as a condition of trade.
• Security Registration Process: Documentation and procedures to ensure PPSR registrations are accurate and timely (particularly for PMSIs). If you need help, we can register a security interest on your behalf.
• Bank Guarantee Requirements: For larger deals, specifying the form of bank guarantee, claim triggers, and return conditions can provide reliable security. Our explainer on bank guarantees covers the essentials.

Not every business needs all of these, but most B2B suppliers will benefit from at least several. The common thread is shifting your position away from the uncertain pari passu pool and into a priority or secured category wherever you can, within the bounds of Australian law.

FAQs About Pari Passu

Does Pari Passu Mean Everyone Gets The Same Amount?

No. It means equal ranking creditors share proportionally. If Creditor A is owed twice as much as Creditor B, Creditor A receives twice the share.

Can I Contract Out Of Pari Passu?

Between consenting creditors, yes - via subordination or intercreditor agreements. But you can’t contract out of statutory priorities or prejudice non‑consenting creditors.

If I Take Security, Do I Bypass Pari Passu Completely?

To the extent of your collateral’s value, yes - you’re paid first from that security. If there’s a shortfall, the unpaid balance usually ranks with the unsecured creditors pari passu.

Is A Retention Of Title Clause Enough?

Usually not on its own. Under the PPSA, many ROT clauses are deemed security interests and must be registered on the PPSR (often as a PMSI) within strict timeframes to be effective against others.

Key Takeaways

• Pari passu is the default rule that unsecured creditors of the same rank share insolvency distributions equally and proportionally.
• Major exceptions include secured creditors under the PPSA, statutory priorities (like employee entitlements), set‑off, and contractual subordination among consenting creditors.
• You can improve your position by taking security, registering on the PPSR, using personal guarantees or bank guarantees, and tightening your terms of trade.
• Core documents like a General Security Agreement, Deed of Guarantee and Indemnity, and well‑drafted Sale of Goods/Terms of Trade help shift you out of the general unsecured pool.
• Act early: build PPSR registration and credit controls into your onboarding process and monitor solvency warning signs to reduce exposure.
• Tailored legal advice ensures your contracts, security and registrations are effective and enforceable in Australia.

If you’d like a consultation on protecting your position against the pari passu rule - including security documents, PPSR registration and terms of trade - you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no‑obligations chat.