Churchill's Pari Passu

Abstract

The conventional interpretation of the pari passu clause found in sovereign debt contracts depends on whether the claim is secured or unsecured. We are told that ratable payments pari passus would be reserved for secured debts only (the idea being that each creditor should get an equally proportional share of the collateral pie). Unsecured debt transactions should not make such a promise of payments equality, would go the argument, with the proper meaning of pari passu in such context being just a pledge not to legally subordinate among similarly-situated creditors. I have found a 1920s example of a pro-rata payments pari passu promise for unsecured sovereign debt. This high-profile case (a critical component of the crucial post-World War I intergovernmental debt restructuring negotiations) can be added to the ever growing list of samples of sovereign ratable payments pari passus that have been found out there. A veritable flood of ratability (both from ancient and current sources) that contrasts sharply with the current efforts by many leading academics, lawyers, policymakers, and financiers to have ratable payments erased from the sovereign debt land. The 1920s pari passu described here is relevant not only due to the unsecured nature of the debt (we had been told that such pari passu was not supposed to exist), but also because it allows us to muse about the presence of the clause in pure sovereign-on-sovereign debt transactions. We wonder: does sovereign-on-sovereign lending carry pari passu clauses? what kind of parity would sovereign creditors enjoy amongst themselves? should the meaning and interpretation of pari passu differ, just because of the differing nature of the lenders? While this last question is not definitively tackled, it seems clear that the 1920s pari passu (authored by none other than Winston Churchill) can provide us with important teachings about the mysterious two Latin words. Above all, and when combined with other similar evidence, the main conclusion may be that the chimerical unsecured ratable payments pari passu, the Unicorn, the Area 51, the Loch Ness Monster of the sovereign debt markets, may have been much more real than presumed.