Negative pledge is a provision in a contract

Contract

A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...

 which prohibits a party to the contract from creating any security interest

Security interest

A security interest is a property interest created by agreement or by operation of law over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets...

s 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

Pari passu

Pari passu is a Latin phrase that literally means "with an equal step" or "on equal footing." It is sometimes translated as "ranking equally", "hand-in-hand," "with equal force," or "moving together," and by extension, "fairly," "without partiality."...

with) the security of the first secured creditor

Secured creditor

A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of the debtor.In the event of the bankruptcy of the debtor, the secured creditor can enforce security against the assets of the debtor and avoid competing for a distribution on liquidation with...

 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. 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

Event of default

Event of default is a term used in commercial loan documentation. It refers to the occurrence of an event which allows the lender to demand repayment of the loan in advance of its normal due date...

.

See also

• Second lien
• Seniority
• Pari passu
  Pari passu
  Pari passu is a Latin phrase that literally means "with an equal step" or "on equal footing." It is sometimes translated as "ranking equally", "hand-in-hand," "with equal force," or "moving together," and by extension, "fairly," "without partiality."...
  
  
• Senior debt
• Subordinated debt
  Subordinated debt
  In finance, subordinated debt is debt which ranks after other debts should a company fall into receivership or bankruptcy....
  
  
• Secured creditor
  Secured creditor
  A secured creditor is a creditor with the benefit of a security interest over some or all of the assets of the debtor.In the event of the bankruptcy of the debtor, the secured creditor can enforce security against the assets of the debtor and avoid competing for a distribution on liquidation with...
  
  
• Unsecured creditor
  Unsecured creditor
  An unsecured creditor is a creditor other than a preferential creditor that does not have the benefit of any security interests in the assets of the debtor....