[Hayk Kupelyants is a PhD candidate at the University of Cambridge]
Pari passu clauses remain perhaps the most nebulous clauses found in sovereign bonds. Among varying wordings, the clause in its simplest form provides that the bonds will rank
pari passu (i.e., on equal footing). The clause puzzled many academics and has given rise to legal battles before national courts, for it is undeniable that the state is not subject to a bankruptcy regime where the
pari passu treatment is naturally well-fitted.
Two interpretations have been offered to demystify the function of the
pari passu in sovereign debt bonds. The first and the most controversial of these constructions argues that the clause requires equal payment to all, even holdout, bondholders. Recently, the Second Circuit Court of Appeal in
NML v Argentina has endorsed this interpretation of the
pari passu clause. Under this construction of the clause, a sovereign debtor is obliged to pay to all bondholders, even those who held out from the sovereign debt restructuring. The
pari passu clause can thus become a powerful tool in the hands of holdout creditors which seek to reclaim the full value of the bonds they hold by claiming that the state is in breach of the
pari passu clause by the mere fact of refusing to pay up.
Many academics have argued that this interpretation of the
pari passu clause is too far-fetched (at least for the
pari passu clauses that do not expressly refer to ‘payment’ in their wording). On its face,
pari passu clauses simply require equal (legal) ranking, whereas the payment under bonds is a question of factual performance of the contract and not a question of priorities or ranking.
The second and the conventional interpretation of the pari passu clause argues that the clause merely ensures equal legal ranking and no factual equality in terms of payment. By this, the sovereign debtor would be under no obligation to pay to all bondholders.
Two counter-arguments spring to mind.
