The document discusses the purposes and limitations of negative pledge clauses. It examines whether an automatic negative pledge clause constitutes a form of security, and analyzes potential remedies for breach of a negative pledge, including damages, injunction, and specific performance. Specifically: 1) A negative pledge aims to maintain equal treatment of unsecured creditors and prevent the granting of security to other lenders, but it does not restrict all unsecured debt. An automatic negative pledge operates as a floating charge that crystallizes upon the creation of prohibited security. 2) Damages are generally not an adequate remedy for breach of a negative pledge since they do not undermine the security granted to other lenders. 3) An injunction may be granted to

1. Purposes of clause: /Philip Wood/
− Security ( eg a universal fixed and floating charge) granted by the borrower to another creditor
or effectively subordinates the bank's unsecured loan and leaves no or few assets for the bank as
unsecured creditor. This is especially important if the borrower is in difficulties when it can only
raise credit on security which is the very time the bank wishes to ensure it ranks pari passu;
− the NP enhances equality between creditors;
− the security reduces the assets available ti the unsecured banks in the event of financial
difficulties which usually require new money which needs to be secured because of the
heightened risk;
− it operates as an indirect control on the incurring of excessive liabilities , indirectly inhibits
excessive borrowing by the debtor.
− in secured transactions, it mitigates problems caused by a second mortgagee.
Scope and efficacy of the negative pledge:
There are limitations on the scope and efficacy of negative pledge
− the NP is bot equivalent to security because the negative pledge does not restrict other
unsecured liabilities ranking equally with the loan or allocare specific assets of the loan
− The ordinary NP often does not restrict transactions having a similar effect to security – quasi-
security or vendor/lessor title finance.
− It is a contractual restriction only, so it is weak if the borrower disregards it. The breach may be
an event of default, but the third party has the security. In practice, most international borrowers
honour their agreements.
Nature of an automatic NP / floating charge?/:
Gregory Hill: It is a floating charge. Recent decisions of the Privy Council and the House of Lords
establish, first, that the classification of a security interest is not determined by the description the
parties give it, but is a question of law turning on the effect of the particular rights and obligations
created by the security document, (see Agnew v CIR [2001] and Re Spectrum Plus Ltd [2005]) and
secondly that a security under which the debtor can deal with the charged asset, and remove it and
its proceeds from the security, until an event happens to terminate that freedom of disposition, is
necessarily a floating charge, even if the parties describe it as a fixed one (Agnew’s case, para 32;
Spectrum Plus). It is submitted that an automatic security clause is therefore to be classified as a
floating charge on all B’s property, which crystallises, in relation to assets subject to prohibited
security, on the creation of that security. If the analysis above is correct, an automatic security
clause is within the principle stated by Lord Scott in Smith v Bridgend Co BC [2002] 1 AC 336,
para 63: ‘... a charge expressed to come into existence on the occurrence of an uncertain future
event and then to apply to a class of assets that cannot be identified until the event has happened
would, if otherwise valid, qualify for registration as a floating charge.’
It follows that an automatic security clause should be registered as a floating charge under
Companies Act 2006 s 860(1) and (7)(f).Hill: it is a floating charge and must be registered. And L's
rights, if appropriately protected, may operate as a proprietary interest as against both B and T.
->The negative pledge with the automatic parts is a floating charge from day one. This is a type of
security that is not attached to a specific asset, but gets fixed to a specific asset when crystallization
occurs.
Professor Goode considers that under a ‘security’ which is contingent on the happening of an
uncertain future event (other than a charge of B’s after-acquired assets), L has contractual rights
only, and not an equitable interest, both at the inception of the transaction (even if B already has the
asset in question) and on the happening of the contingency; ->The automatic negative pledge is only
a contractual promise, not a form of security.
Mr Gabriel’s view is that L obtains an equitable interest when, but only when, the specified event
occurs, therefore , it does not require registration-> It is capable of giving rise to security when the
clause is broken.

2. Remedies:
a) Damages and acceleration
The normal remedy is damages. Damages are available generally.
A lender under a term loan does not have an inherent right to demand early repayment of its loan:
Cryne v. Barclays Bank PLC [1987]. It can only do so if the loan facility agreement gives it that
right: The Angelic Star [1988]. This is normally be done in accordance with the “events of default”
clause., under which series of possible events occurs, the lender will have the right to suspend or
terminate the facility and demand repayment.
In the past loans were often not secured. So the creditors were generally unsecured, the markets
were small and the companies and governments had high credit ratings. The negative pledge tried to
prevent other creditors getting ahead of the queue of unsecured creditors. It tried to make sure that
the creditors were all in the same situation and maintain the pari passu treatment. All unsecured
creditors are treated equally.
In today’s world most lending is secured, so the negative pledge is not as useful today.If the
negative pledge is trying to maintain the parity of treatment, how can damages be an appropriate
remedy? The damages are not going to undermine the security. There are going to be less assets to
distribute to the unsecured creditors. So damages are clearly not an appropriate remedy.
b) Injunction
If the borrower has not notified the lender but has gone ahead and created security, the original
lender might well not find out about the security until he tries to recover his own loan and realises
that the pool of assets he thought to be available to meet his claim has been diminished by the rights
of other, secured creditors, all of which provide a great deal less comfort than true security.
The court exercise its discretion to grant the injunction, when damages are not an adequate remedy.
(Graham Roberts) However , in circumstances where there is a clear breach of a negative term, the
courts will de facto only have to sanction that breach by way of granting an injunction. No proof of
damage seems to be required and thus also no proof as to the inadequacy of damages as remedy,
thus making the way to the grant of an injunction to restrain a breach of pure negative covenant less
onerous than usual. Doherty v Allman [1878], and R Cranston in Principles of Banking Law.
The problem that arises is that the lender might not have the requisite knowledge as to the breach of
the clause until it is to late. It is also unclear what should be considered as an intention to break the
covenant that would be sufficient in order to obtain such an injunction. The taking up of
negotiations with credit institutions, which can only provide secured credit, could be one example,
but even in this case the claimant must show that breach is an inevitable result, ie the breach will
occur with great probability. Pattison v Gilford [1874]
The grant of interim injunctions have been made somewhat easier by the HL decision in the
American Cyanamid Co v Ethicon Ltd. [1975]. Contrary to the previous rule where an interim
injunction would only be granted given that the claimant could present a prima facie case, Lord
Diplock made it clear that this was not longer the rule. The rule laid down in the American
Cyanamid case is that unless the case is clearly vexatious it will be allowed as long as there is a
‘serious question’ to be tried. Whether the injunction as such will be granted will then depend on the
balance of convenience test. Should one party suffer irreparable damages compared to the other in
the intervening period prior to the trial, an injunction would be granted in favour of this party.
Through an injunction the creditor can prevent the security from ever being created. It will be
relatively easy to convince the court to exercise its discretionary power in this case. But the creditor
has to anticipate the breach and therefore be aware of the security before it has been created and

3. potentially perfected (depending on the jurisdiction). The time period is very short. The vast
majority of security is perfected by registration which takes place within 21 days after its creation.
So this alternative remedy is effective only if you are aware of the future breach.(Maybe reps and
warranties in the contract can stipulate that the borrower has to give this kind of information to the
lender).
If the lender does discover the breach at a time when the loan is still performing, calling in the loan
could push the borrower into insolvency and the original lender would have to wait his turn behind
preferential and secured creditors.So putting the borrower under pressure can be counter-
productive.
c) Specific performance
In general specific performance will only be granted in cases were this remedy will ‘do more
perfect and complete justice than an award of damages’: Tito v Waddell [1977] ; Wilson v
Northhampton and Banburry Junction Rly Co. [1974] . The inadequacy of damages is therefore not
per se a necessary condition for the grant of specific performance although it is an factor to be
taking into consideration.
A factor, which however might prevent the grant of specific performance, is whether the obligation
to grant ‘similar security’ is sufficiently defined for the courts to enforce it. It has thus be held that
in cases where the obligations sought to be enforced are ill-defined a court will not grant specific
performance on the grounds that the terms of the court’s order compelling the performance would
be equally ill-defined with the possible consequence of endless litigation over compliance. This
argument however seems to apply more to cases where there is a continuing obligation and where
continuing supervision by the courts might be required. In relation to the furnishing of similar
security there seem to be no such problems. A similar security could be identified with reference to
the security granted in breach of the covenant, ie with reference to the type of asset, the amount
secured, the type of security interest etc. Where the borrower no longer has assets equivalent to the
security securing the subsequent bonds, the court will by exercise of its discretion have to find the
closets alternative.
While the remedy may work in some circumstances it is quite clear that it has its limitation; it is
only useful against a borrower who still has unencumbered assets left. If the breach of the covenant
is committed as a response to adverse financial conditions the remedy may be futile. Furthermore as
an equitable remedy it is subject to the usual maxims of equity, among others that the investors
come with clean hands.
Specific performance /Consideration issues
Hill: If an agreement for a charge, or for any other interest in property, provides that the grantee’s
entitlement shall only arise on the occurrence of a specified event which may or may not happen,
the agreement can be specifically enforced, it is submitted, after that event happens.
Professor Goode asserts that in the case of an agreement for L to have automatic security over assets
which B charges to third party in breach of a negative pledge, specific performance is not available
because L provides no new consideration at that time.
Goode draws distinction between an agreement for security over B’s after-acquired property, which
is specifically enforceable and therefore effective to confer an equitable security interest on L when
B acquires relevant property, Holroyd v Marshall [1862] and an agreement for security to arise on
any other contingency, which is said to require fresh consideration.
Hill's contra-argument: It is correct, of course, that obligations undertaken gratuitously will not be
specifically enforced (‘equity will not perfect an imperfect gift’) and that an obligation to make a
loan, even a secured loan, will not be specifically enforced, in favour of either party, before the
money is advanced: Rogers v Challis [1859] . But it is submitted that neither of these principles

4. applies where L actually makes a loan on terms that if a certain event happens, the debt shall be
charged on identifiable property of B.
As Mr Gabriel points out, by lending the money L provides consideration for all B’s obligations
under the loan agreement, including the negative pledge and the provision for automatic security if
a prohibited security is created.
Hill: Automatic security clause does confer on L a right to security which is, at least, specifically
enforceable as against B, in respect of the assets subject to the prohibited security, when that
security comes into being in favour of the third party.
In Re Jackson and Bassford Ltd [1906] 2 Ch 467 and Re Gregory Love & Co [1916] , a director of
the company gave its bankers security for its overdraft; the company agreed to give the director
counter-security on demand; a demand was made and counter-security granted shortly before the
company went into insolvent liquidation; and the counter-security was held invalid against the
liquidator, as a fraudulent preference within the equivalent of Insolvency Act 1986 s 239. The
correct analysis, it is submitted, is that if parties make an agreement to grant a security not
immediately but on demand at a future time, they are to be taken at their word, and the insolvency
‘hardening’ period runs from when the grant is actually made. But it does not follow that under the
general law, the security is granted for no consideration: the grant is, rather, performance of an
obligation undertaken by the company in consideration of the director providing security for the
overdraft, and (as Mr Gabriel points out) in both the cases cited, the Court proceeded on the basis
that as between the director and the company, the agreement for security was valid and enforceable.
(Re Jackson and Bassford Ltd [1906] ; Re Gregory Love & Co [1916] )
In Williams v Burlington Investments Ltd [1977] the owner sold the land to a developer on terms
making additional consideration payable on planning permission being granted, and the developer
was to grant to the vendor, on request, a legal charge to secure such further payments; after
completion of the sale, that agreement was registered against the developer as a Class C(iv) land
charge, though not under the Companies Act 1948s 95; the developer granted a legal charge to
secure money borrowed from financiers, who knew the terms of the original sale agreement;
planning permission was granted and a further sum became payable to the vendor; and the
developer executed a legal charge in accordance with the sale agreement.
The House of Lords held that a contingent right to a charge over unregistered land, registered as an
‘estate contract’, was binding on a mortgagee whose mortgage was created before the contingency
happened. An agreement not have to be registered under Companies Act 1948 s 95 (because it did
not create a present equitable right to a security), and that its registration as an estate contract under
the Land Charges Act 1925 gave it, and the vendor’s legal charge when granted, priority over the
financiers’ security. Therefore, it is submitted, the fact that the vendor’s right to a charge was still
contingent (on planning permission being granted) did not prevent it from being a proprietary
interest when the financiers took their charge.
Professor Goode considers, however, that in Williams v Burlington Investments Ltd the Land
Charges Act registration gave proprietary effect, and priority, to what would otherwise have been no
more than a personal contract between the vendor and the developer: ‘This is one of the
exceptional cases in which a mere personal contractual right can produce a security effect by virtue
of the statutory registration provisions.’ But this, it is submitted, is not the effect of the Land
Charges Act 1925, nor of its successor the Land Charges Act 1972.
There is a possible argument that no proprietary right is created by an agreement under which the
grantee’s entitlement depends on a further act of volition by the grantor: in Pritchard v Briggs
[1980] the Court of Appeal held that a right of pre-emption does not, when initially granted, confer
any proprietary interest, because the grantee has no enforceable right unless the grantor
subsequently decides to dispose of the property; though the majority of the court also held that if a
land charge is registered in respect of the agreement and the grantor does decide to sell, so that the
grantee becomes entitled to an option to purchase, the priority of the option is protected by the

5. registration. The decision has been criticised, and has been reversed in relation to registered land
(Land Registration Act 2002 s 115). It is not clear from the judgments whether the principle of
Pritchard v Briggs applies only to an agreement that if the grantor decides to dispose of the
property, the grantee is entitled to require the disposal to be made to him, or whether it also includes
other contingencies dependent on the grantor’s volition; it is submitted that the decision ought not
to be extended beyond rights of pre-emption or first refusals.
On the assumption that Pritchard v Briggs is not applicable, it is submitted that the automatic
security above confers on L a security interest contingent on B creating a prohibited security, and
that L’s contingent interest is an equitable proprietary one, not merely contractual, which will be
binding on T if it is appropriately registered. Any risk that Pritchard v Briggs extends to all
contingent rights dependent on the grantor’s volition, including a charge in favour of L if B creates
a prohibited security, can be met, it is submitted, by providing in the automatic security clause that
L’s charge arises if B ‘decides to create’ other security: under that wording, L’s charge will arise
before any security is actually granted in favour of T, and on the reasoning of the majority in
Pritchard v Briggs, L will then be entitled to priority over T if the automatic security clause has
been protected by registration.
Procuring a breach of contract /claim against the third party/
To do that it would need to establish the following (the requisite elements of the tourt may be found
in OBG Ltd v. Allan; Mainstream Properties Ltd v. Young [2007]):
1. That there had been a breach by the borrower of the contract between it and the lender, which
may be difficult to establish if there is a broad spectrum of exceptions to the restrictions in the
clause
2. The third party must have known that it was inducing a breach by the borrower of its contact
with the lender. It is not enough that the third party ought reasonably to have appreciated the
likely effect nor that it should have realised, but did not , that the act done by the borrower
would, as a matter of law or construction of the contract, amount to a breach of its contract with
the lender. The issue is purely subjective.
3. There is question of what would amount to sufficient knowledge on the part of the third party
of the contact, its terms and their breach apart from actual knowledge. Actual knowledge is
sufficient and a reckless indifference to the facts could constitute a sufficient degree of
knowledge. Merkur Island Shipping Corporation v. Laughton [1983]. Negligence , even a gross
negligence , such as by negligently making the wrong enquiries , would not be sufficient to
ground the tort. It is also submitted that merely having consctructive knowledge would be
insufficient knowledge for these purposes , when taken in conjunction with the second of the
matters that must be established: Swiss bank Corp v. Lloyads Bank Ltd [1979]. Furthermore, it
has been held that constructive knowledge of the existence of a charge by virtue of its
registration in the Companies Registry, does not give constructive knowledge of the contents of
the charge instrument. Futher, it has been held that the equitable doctrines of constructive notice
are not to be imported into commercial transactions: Feuer Leather Corpn v. Frant Johnstone&
Sons [ 1981].
4. The third party must possess an intention to procure the breach of contract. If the breach of
contract is merely a foreseeable consequence of the action taken by the third party nor the
means of achieving some other intended consequences, then there will not be an intention on its
part to cause the breach of contract. Furthermore, if the third party, knowing of te contact, has
been assured by the borrower that it will nit be breaching its contract with the lender because it
has the lender's consent or because an exception applies, and the third party honestly believes
that answer, it will lack the necessary intention. Mainstream Properties Ltd v. Young [2007]->
there must be a specific intention to inflict economic harm. In Mainstream Prop. Court held that
it must be shown that the object of th third party is to inflict harm on the claimant, either as an

6. end in itself, or as a meant to another end.. It is not enough to show that the action of the third
party was deliberate in the sense that it was not accidental but was a voluntary action. Ignorance
is a defence so that third party could rely on a mistake of law to explain why he took the action
that he did. Of the facts the third party did not have the necessary intention to commit the tort.
This case shows that proving the tort is difficult in the normal case.
Taking this various requirements together, the lender may find that it has an uphill struggle in
making out its claim against the third party.