Negative pledge

Negative pledge
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Contract law
Part of the common law series
Contract formation
Offer and acceptance · Mailbox rule
Mirror image rule · Invitation to treat
Firm offer · Consideration
Defenses against formation
Lack of capacity
Duress · Undue influence
Illusory promise · Statute of frauds
Non est factum
Contract interpretation
Parol evidence rule
Contract of adhesion
Integration clause
Contra proferentem
Excuses for non-performance
Mistake · Misrepresentation
Frustration of purpose · Impossibility
Impracticability · Illegality
Unclean hands · Unconscionability
Accord and satisfaction
Rights of third parties
Privity of contract
Assignment · Delegation
Novation · Third party beneficiary
Breach of contract
Anticipatory repudiation · Cover
Exclusion clause · Efficient breach
Deviation · Fundamental breach
Remedies
Specific performance
Liquidated damages
Penal damages · Rescission
Quasi-contractual obligations
Promissory estoppel
Quantum meruit
Related areas of law
Conflict of laws · Commercial law
Other common law areas
Tort law · Property law
Wills, trusts and estates
Criminal law · Evidence
v · d · e

Negative pledge is a provision in a contract which prohibits a party to the contract from creating any security interests over certain property specified in the provision.

Negative pledges often appear in security documents, where they operate to prohibit the person who is granting the security interest from creating any other security interests over the same property, which might compete with (or rank pari passu with) the security of the first secured creditor under the security document in which the negative pledge appears.

In Australia, negative pledge lending took off after a substantial deal by Pioneer Concrete in 1978.[1] It was a new way of lending, which allowed the banks to lend to corporations, something previously the domain of life insurers.

Negative pledge clauses are almost universal in modern unsecured commercial loan documents. The purpose is to ensure that a borrower, having taken out an unsecured loan, cannot subsequently take out another loan with a different lender, securing the subsequent loan on the specified assets. If the borrower could do this, the original lender would be disadvantaged because the subsequent lender would have first call on the assets in an event of default.

See also

References

  1. ^ Trevor Sykes, The Bold Riders, second edition, 1996, ISBN 1-86448-184-6, pages 7-10

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