Negative Pledge

Hi Leo

Imagine that you’ve lent some money to a company but you’ve been very careful about the deal so you have agreed with the company that your loan should be secured

The company offers to pledge its assets, including goodwill, as the security and that security and the loan are duly registered with the Registrar of Companies and correctly recorded within the company’s own Register of Mortgages and Charges

Some time later, say 3 years, the company is still struggling so looks to borrow more money from the bank (or anyone, it doesn’t have to be a bank) That second lender is also cautious and asks for security. The company offers a specific asset (say the company’s factory and offices) as security for a fixed charge

Now, those premises were a part of the security that you were granted “… to pledge its assets, including goodwill …”

But a fixed charge ALWAYS takes precedence over a floating charge on the same assets so the value of your security has just been eroded by the later creation of that fixed charge

How could you protect that sort of thing happening? By insisting on the inclusion of a negative pledge clause within the loan agreement that was written on the occasion of you making your loan to the company

And that clause requires the company to notify you whenever there is a situation where the company is about to agree to the pledging of specific assets to secure a fixed charge loan

And, if you’re not happy about this subsequent fixed charge loan, you can ask for the repayment of your own floating charge loan

Is that better?

As always, you’re very welcome