Pari Passu Principle.

22 Mar 2026 --
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Meaning of Pari Passu

“Pari passu” is a Latin term meaning “on equal footing” or “with equal step.”

👉 In legal context, it means:

Creditors of the same class are treated equally and proportionately
No creditor in that class gets priority over others

🔹 Core Concept

When a company is being liquidated or undergoing insolvency:

Its assets are distributed among creditors
Creditors of the same category (e.g., unsecured creditors) are paid proportionally
No discrimination is allowed within that class

🔹 Illustration

Suppose:

Total assets: ₹1,00,000
Three unsecured creditors:
- A: ₹50,000
- B: ₹30,000
- C: ₹20,000

Under pari passu:

A gets 50% → ₹50,000
B gets 30% → ₹30,000
C gets 20% → ₹20,000

If assets were insufficient (say ₹50,000 total):

A: ₹25,000
B: ₹15,000
C: ₹10,000

👉 Everyone suffers proportionally, not selectively.

🔹 Key Features

Equality within class – Same-ranking creditors are treated equally
Proportional distribution – Payment based on claim size
No arbitrary preference – Prevents favoritism
Applies mainly in insolvency & liquidation
Subject to statutory priorities (e.g., secured creditors, government dues)

🔹 Exceptions to Pari Passu

Pari passu does not apply where:

Secured creditors have priority
Statutory dues (like taxes) are preferred
Contractual subordination exists
Insolvency laws create waterfall mechanisms (e.g., IBC in India)

🔹 Importance

Ensures fairness and equity
Maintains creditor confidence
Prevents fraudulent preference
Forms the backbone of insolvency distribution systems

🔹 Case Laws (At Least 6)

1. ICICI Bank v. Sidco Leathers Ltd. (2006)

Supreme Court held that secured creditors sharing a charge rank pari passu
However, statutory dues may override depending on law
👉 Clarified interplay between pari passu and statutory priority

2. Allahabad Bank v. Canara Bank (2000)

Supreme Court emphasized that creditors with equal rights must be treated pari passu
Addressed conflict between different recovery forums
👉 Reinforced equal treatment principle

3. Union of India v. SICOM Ltd. (2009)

Court held that government dues do not automatically override secured creditors
Pari passu applies among secured creditors unless statute states otherwise
👉 Limited Crown’s preferential rights

4. Official Liquidator v. Allahabad Bank (2013)

Supreme Court discussed distribution of assets during liquidation
Reinforced that similarly placed creditors are paid pari passu
👉 Important for winding-up proceedings

5. Swiss Ribbons Pvt. Ltd. v. Union of India (2019)

Landmark IBC case
Supreme Court upheld classification of creditors but recognized:
- Within a class, pari passu treatment must be maintained
  👉 Strengthened fairness in insolvency resolution

6. Committee of Creditors of Essar Steel v. Satish Kumar Gupta (2019)

Supreme Court clarified:
- Operational creditors can be treated differently from financial creditors
- But within each class, distribution should follow fairness principles akin to pari passu
  👉 Introduced “equitable but not identical” treatment

7. Workmen of M/s Firestone Tyre & Rubber Co. v. Official Liquidator (1973)

Workers’ dues and secured creditors may rank pari passu under certain provisions
👉 Highlighted statutory pari passu protection for workers

🔹 Pari Passu Under Insolvency and Bankruptcy Code (India)

Under the IBC, 2016:

Distribution follows a waterfall mechanism (Section 53)
Within each level:
- Creditors are treated pari passu

Example:

Workmen dues and secured creditors → share pari passu

🔹 Conclusion

The Pari Passu Principle ensures equitable distribution of assets among similarly placed creditors. While modern insolvency frameworks allow classification, the core idea of fairness within a class remains intact.

It acts as a safeguard against discrimination and is essential for maintaining trust in financial and legal systems.