Pari passu is Latin for 'on equal footing', and in a credit agreement it means exactly that: the bank's claim on your business must rank equally with the claims of every other unsecured creditor. The clause is present in virtually every Belgian credit facility — from a straightforward term loan at KBC to a syndicated revolving credit arranged by BNP Paribas Fortis — and most borrowers never think about it again after signing. That near-invisibility is, in healthy times, precisely correct. The clause does nothing until something goes wrong.
The reason pari passu deserves your attention is not what it costs you today — it costs you nothing operationally — but what it prevents. It stops you from quietly rearranging your creditor stack so that the bank, nominally unsecured, finds itself at the back of the queue when it matters most. The legal mechanism through which this rearrangement can happen — structural subordination — is the core concept this article explains. Understanding it is essential for any founder or CFO who may, in the years after signing, consider intercompany transactions, management fee arrangements, or group restructuring that affects the flow of cash through the indebted entity.
Pari passu also has a second life: it becomes the bank's legal tool in an insolvency or restructuring context. Under Belgian insolvency law — the WCO (Wet Continuïteit Ondernemingen / Loi sur la Continuité des Entreprises) proceedings and Book XX of the Belgian Economic Law Code (Wetboek Economisch Recht / Code de droit économique) — the pari passu obligation underpins challenges to preferential payments made to related parties or favoured creditors in the period before filing. It is, in short, a covenant that does little when everything is fine and matters enormously when things are not.
What Does Pari Passu Mean?
A pari passu covenant obliges the borrower to ensure that its payment obligations to the bank rank at least equally — in right of payment, priority, and security — with all of its other present and future unsecured payment obligations. 'At least equally' is the operative phrase: it does not require you to treat the bank better than other creditors, only to prevent the bank from being treated worse. If you have five unsecured creditors and you honour all their claims equally, the covenant is satisfied. If you create an arrangement — formal or informal — that effectively places one or more of them ahead of the bank without granting equivalent preference to the bank, you are in breach.
The covenant typically sits alongside, and works in tandem with, a negative pledge clause. The negative pledge prevents you from granting security (mortgages, pledges, floating charges) to other creditors without extending equivalent security to the bank. The pari passu clause covers the broader ground: it prevents any arrangement — whether or not it technically creates a security interest — that results in structural priority for other unsecured creditors. Think of them as two sides of the same protection. The negative pledge catches formal security; pari passu catches everything else that might produce the same economic result.
It is important to understand who the clause does not affect. Secured creditors who legitimately rank ahead of the bank on their collateral — for example, a mortgage lender with a registered hypothec over your business premises — are not within scope. Their priority flows from their security, not from a breach of your credit agreement. Similarly, statutory preferential creditors — the Belgian tax authority (FOD Financiën / SPF Finances) and the national social security office (RSZ / ONSS) — rank ahead of ordinary unsecured creditors as a matter of Belgian law. You cannot contract around that statutory priority, and the pari passu clause does not purport to do so. Finally, subordinated creditors — shareholder loans or mezzanine lenders who have explicitly agreed to rank behind the bank through a subordination agreement — legitimately rank below the bank and are also outside the clause's concern.
Why Banks Insist on Equal Ranking
Belgian banks extend unsecured or partially secured credit to SMEs on the basis that, absent a specific security interest, they will share equally in any recovery from the borrower's assets. The bank's credit model is built on this assumption. If, after drawdown, the borrower can quietly arrange for other creditors to move ahead of the bank without the bank's knowledge or consent, the credit decision made at origination is undermined. The bank approved credit on one set of facts; the borrower then changed those facts unilaterally. Pari passu is the legal mechanism that makes this impermissible.
Belgian banks operating under the EBA's loan origination guidelines (EBA/GL/2020/06) are required to monitor the risk profile of their credit book on an ongoing basis. A borrower that has structurally subordinated the bank — even without any new borrowing and even without an immediate cash flow problem — represents a materially higher credit risk than the one that was approved. The pari passu covenant enables the bank to detect and respond to this risk shift contractually, rather than waiting for the practical consequences to emerge at a restructuring table.
There is also a systemic reason. If pari passu were not standard, the rational response of any sophisticated creditor — trade suppliers, tax authorities, related-party lenders — would be to extract preferential treatment while they could, knowing that the bank has no contractual basis to object. The universality of the clause, across virtually every Belgian credit facility, is what makes the equal-ranking framework credible. It is one of those covenants whose value derives partly from its ubiquity: every creditor knows that every borrower with a bank facility has promised equal ranking, and that promise is legally enforceable.
Structural Subordination: What the Clause Prevents
Structural subordination is the mechanism the pari passu clause is designed to prevent. It occurs when a borrower — without granting formal security and therefore without triggering the negative pledge — arranges its affairs so that the cash or value of the business flows to other parties before reaching the bank. The bank's claim remains nominally unsecured and nominally equal to other unsecured obligations; but in practice, by the time those other obligations have been satisfied, there is nothing left for the bank to recover.
A concrete Belgian example: your operating company (NV / SA) is the borrowing entity, carrying €3 million of bank debt. The parent holding company charges a management fee to the operating company — say €400,000 per year — for 'group services'. That fee is paid in priority, every quarter, out of the operating company's cash flow, before bank interest is even approaching. The parent receives the cash; the bank's borrower is progressively drained. If the business subsequently enters gerechtelijke reorganisatie (judicial reorganisation) or bankruptcy, the bank finds that the operating company's liquid assets have been systematically transferred to the parent — a related party that is not itself a creditor of the bank and owes the bank nothing. A second pattern: a new special-purpose entity is created to hold the business's key contracts or receive its receivables. The indebted operating company becomes a shell that performs the work but does not receive the economic value. The cash flow goes upstream to the SPE; the debt stays downstream in the borrower. Pari passu, read with the negative pledge and additional debt restriction covenants, gives the bank the contractual basis to challenge both arrangements.
Less dramatic but equally relevant are inter-company loan repayments made to shareholders or group companies ahead of bank debt service, or preferential payment terms extended to a related-party trade creditor — paying a related-party supplier on seven days when the standard is sixty days, effectively giving that supplier a cash advance at the expense of the bank's security margin. These arrangements are common in Belgian family-owned business groups and are not inherently problematic — but once a bank facility is in place, they must be structured in a way that does not result in the bank being practically subordinated even while formally equal.
If your business is part of a group and involves management fees, inter-company loans, or shared services arrangements, have your accountant or legal counsel review these structures against your pari passu and negative pledge obligations before any new bank facility is signed. The cost of getting this wrong is not a conversation with your banker — it is a potential event of default.
Pari Passu in Belgian Insolvency Proceedings
The pari passu clause is 'dormant' in normal times — it sits in the facility agreement and does nothing observable. It becomes live in two situations: a restructuring under WCO proceedings, or formal insolvency under Belgian law. In both contexts, the equal-ranking principle is what the bank uses to challenge payments that shifted value away from the borrower in the period before the proceeding was filed.
Under the Belgian Insolvency Code (Book XX WER/CDE), payments made in the période suspecte / verdachte periode — the 'suspect period' — can be challenged and unwound (pauliusvordering / action paulienne) if they constitute preferential treatment of one creditor over others at a time when the debtor was already in financial difficulty. The look-back period is typically six months before the filing of a request for judicial reorganisation or bankruptcy, but the court can extend this in cases of fraud. Payments to related parties — the management fees, inter-company loan repayments, and upstream cash sweeps described above — are the prime targets. The bank's pari passu covenant provides the contractual foundation for arguing that these payments were not merely preferential under insolvency law but were also a breach of the credit agreement at the time they were made, which strengthens the bank's position in any challenge.
In WCO proceedings (gerechtelijke reorganisatie), the business is attempting to restructure under court supervision and produce an approved reorganisation plan. The bank, as a major creditor, has a seat at the table — and the pari passu clause is part of the factual matrix that the court-appointed mediator (gerechtsmandataris) or the creditor vote considers when evaluating whether prior payments to related parties were legitimate. A Belgian bank that can demonstrate a pari passu breach will use that finding to resist a reorganisation plan that imposes losses on the bank while related parties have already received preferential repayment. Practically, this means that founders considering a WCO filing should urgently review — with their accountant and legal counsel — every payment made to related parties in the preceding six to twelve months. Payments that breach pari passu are a liability that sits on top of the underlying financial distress.
Belgian law's période suspecte / verdachte periode means that inter-company payments made in the months before a WCO filing or insolvency can be challenged and reversed. This is not an abstract risk: it is the mechanism by which banks recover value in Belgian restructurings. If your business is under financial pressure, stop all non-arm's-length payments to related parties immediately and take legal advice before any WCO filing.
What to Watch After Signing
In practical terms, the pari passu covenant requires almost no active monitoring in a healthy business. There is no ratio to calculate, no test date to prepare for, no compliance certificate that specifically covers it. What it does require is awareness at the point of decision — any time your business is considering a transaction with a related party that involves cash leaving the borrowing entity, someone should ask: does this create structural subordination of the bank? The list of triggering events is short but important: introduction of management fee arrangements or changes to existing ones; new or increased inter-company loans; restructuring of group legal entities that moves contracts, receivables, or assets away from the borrowing entity; changes to payment terms with related-party suppliers or customers.
The interaction with the negative pledge covenant is worth internalising. Those two clauses together cover the full territory of arrangements that could impair the bank's position: the negative pledge catches formal security interests; pari passu catches structural and economic priority. If you are ever told that a proposed transaction 'does not create security' and therefore does not trigger the negative pledge, that is only half the analysis. The same transaction may still produce structural subordination and breach pari passu. Both clauses need to be reviewed together, and for any transaction of meaningful size, that review should involve legal counsel familiar with Belgian credit documentation.
Watch also for the pari passu clause in the context of additional bank facilities. If your business takes out a second loan — from a different Belgian bank, or from a development finance institution such as PMV (Participatiemaatschappij Vlaanderen) or the SFPI/FPIM — that second facility may itself contain a pari passu clause. Two simultaneous pari passu obligations create a matrix of equal-ranking commitments across both facilities. Repaying one lender ahead of schedule, or paying one bank's fees without an equivalent payment to the other, can theoretically constitute a pari passu breach of the second facility. In practice, Belgian banks do not police this aggressively in ordinary course, but it becomes relevant in a distress scenario where both banks are at the table.
Negotiating Pari Passu Provisions
Pari passu is one of the least negotiable covenants in a Belgian credit agreement. It is standard drafting, and Belgian banks do not typically accept wholesale deletion. The negotiation focus is therefore on carve-outs and permitted exceptions rather than on the core obligation. The most important carve-out to negotiate — particularly for businesses that are part of a group — is an explicit permission for arm's-length management fees and inter-company services at commercially reasonable rates, provided these are disclosed to the bank and consistent with arrangements in place at drawdown. This moves the management fee question from a potential covenant breach to a disclosed permitted payment, provided it stays within agreed parameters.
A second carve-out worth negotiating is for subordinated shareholder loans: if a shareholder has lent money to the business on explicitly subordinated terms — contractually ranking behind the bank, with no repayment permitted without bank consent — that shareholder loan should be carved out of the pari passu obligation on the basis that it legitimately ranks below the bank rather than equally. Without this carve-out, a strict reading of the clause could produce the paradox that making the shareholder a subordinated creditor is itself a breach (because the shareholder is no longer equal with the bank). Virtually all Belgian banks accept this carve-out as standard; if it is not already in the draft, ask for it.
Finally, for businesses in groups where inter-company cash pooling arrangements are used — common in Belgian mid-size corporate groups — ensure that the pari passu clause is drafted to permit participation in a cash pooling structure at the bank's own institution or an approved counterparty, provided the bank is the pool leader or has explicitly consented. Cash pooling, without an explicit permission, can be read as creating preferential cash flow to a group treasury entity. Most Belgian banks that provide cash pooling services include this permission as boilerplate; if your facility is with a different bank from the one running your group's pool, the permission needs to be negotiated explicitly. Cross-reference any inter-company arrangements negotiated here with your additional debt restriction covenant, which may separately govern inter-company lending within the group.
The fastest way to see whether a Pari passu covenant — and every other condition — is in your term sheet is to let Credia read it for you. Upload the PDF and you get every covenant identified and explained, in plain language, in under two minutes.
Analyse your term sheetNew to term sheets? Read our term sheet guide.
Frequently asked questions
What is a Pari passu covenant?
A pari passu clause requires the borrower’s obligations under the facility to rank at least equally with all other unsecured obligations. No creditor should have structural priority over the lender.
What does a Pari passu covenant restrict?
Cannot create arrangements that give other unsecured creditors preferential treatment in a restructuring or insolvency. Structurally important but rarely actively managed day-to-day.
Can you negotiate a Pari passu covenant?
Most covenant terms are negotiable at the term sheet stage, before the legal documentation is drawn up. With the Pari passu covenant, focus on the definition, the threshold, the testing frequency, and the cure period. Ask your relationship manager what flexibility exists, and have your accountant confirm the level is one your business can hold comfortably. Read every line.