Pari Passu Loan Agreement UK: Key Terms Explained

What this document is

A loan agreement, sometimes called a credit facility agreement, is the contract that records the terms on which one party lends money to another. A pari passu ranking version is an unsecured loan contract that also includes a clause requiring the borrower to treat this debt equally with its other unsecured liabilities.

The Latin phrase pari passu simply means 'on equal footing'. In practical terms, the clause prevents the borrower from taking on new financial commitments that would legally rank ahead of this loan in the event of insolvency or winding up.

It does not convert the loan into secured debt, and it does not give the lender priority over creditors who already hold proper security such as a debenture or a charge. What it does is protect the lender from being pushed further down the queue by later arrangements.

This structure suits loans between companies, loans between private individuals, and director or shareholder loans into a trading business, particularly where taking formal security over assets would be disproportionate to the sums involved.

How to use this document

1. Identify the parties accurately. Set out the full legal names and registered or home addresses of both the lender and the borrower. For companies, use the exact name on the Companies House register and include the company number. Getting this right matters because a contract naming the wrong entity can be extremely difficult to enforce if a dispute arises later.
2. Fix the commercial terms clearly. Agree the principal amount, the interest rate (and whether it is fixed or variable), the repayment schedule, and any fees or costs. Decide whether interest accrues daily, monthly, or annually, and whether it is simple or compound. Ambiguity on money points is the single most common reason loan disputes end up in front of a judge.
3. Decide on guarantees and security. Consider whether a third party will guarantee the borrower's obligations, and whether any security will be taken. A pari passu clause alone is not security, so if you want a charge over assets you need a separate document such as a debenture, properly registered at Companies House where the borrower is a company.
4. Include the pari passu and default provisions. Draft the ranking clause so the borrower cannot create obligations senior to this debt, and define clearly what counts as a default. Typical triggers include missed payments, insolvency events, breach of warranties, and cross-default with other agreements. Spell out what happens on default, usually acceleration of the full balance.
5. Sign, date, and keep clean records. Both parties should sign and date the agreement, with witnesses if desired. Keep the original safe, and record every payment made against it. If terms change later, document the variation in writing rather than by text or email, because informal changes often become contested months or years down the line.

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