Understanding First Charge, Second Charge, and Pari Passu Charge in Financing

In secured lending, terms like 'first charge,' 'second charge,' and 'pari passu charge' are pivotal, delineating the priority and rights of lenders over a borrower's assets. These distinctions profoundly affect the dynamics of lending, particularly in default or insolvency scenarios. Here's an exploration of their meanings and implications in financing arrangements.

First Charge

• Definition: A first charge denotes the highest-priority legal claim or security interest granted to a lender over specific borrower assets.
• Priority: Lenders with a first charge enjoy foremost rights to recover their debt from the proceeds of the sale of secured assets.
• Examples: Primary mortgages on real estate properties or loans secured by specific assets such as equipment or machinery commonly entail first charges.

Second Charge

• Definition: A second charge signifies a security interest granted to a lender over the same assets as those under a first charge, albeit with lower priority.
• Priority: Lenders holding a second charge rank behind those with a first charge concerning repayment priority from the proceeds of secured assets.
• Examples: Situations where borrowers already have existing debt secured by certain assets and seek additional financing secured by the same assets typically involve second charges.

Pari Passu Charge

• Definition: A pari passu charge, translating to 'on equal footing' in Latin, entails multiple lenders holding equal rights or charges over the same pool of assets.
• Priority: Lenders with a pari passu charge share equal priority and rights to assets, ensuring equitable treatment in default scenarios.
• Examples: Syndicated loans or instances where multiple lenders jointly finance a project and share security over the project's assets often involve pari passu charges.