Considering purchasing a UK business? Download this free guide for practical tips on conducting due diligence and reducing risks.<\/p>\n <\/div>\n \n\nDownload Now<\/a> <\/section>\n <\/div>\n\n\n\n\n For banks, lending is a risky endeavour. This is because there is always the chance that the borrower will not repay the loan. One way banks can provide themselves with some reassurance that you will repay the loan is by procuring a negative pledge. <\/p>\n\n\n\n A negative pledge is a kind of \u201cundertaking<\/a>\u201d, which is a legally enforceable promise. It is an undertaking not to do something. If your company agrees to such a pledge in a loan agreement, it promises not to grant any other security interests in its property. <\/p>\n\n\n\n For example, you might give Bank A the right to take possession of your company\u2019s property and sell it to recover the loan amount if you default. Moreover, you promise in the same loan agreement not to grant another bank a security interest in your company\u2019s property. Consequently, Bank A will get first dibs on your assets if your company defaults.<\/p>\n<\/div>\n\n\n\n Alternatively, the negative pledge might state that if your company does grant another security interest, the additional security interest will be subordinate to the bank\u2019s existing security interest. <\/p>\n\n\n\n For example, suppose you grant another lender security interest in the same property. Should your company default on its loan, Bank A may have difficulty exercising its legal rights to sell your property. Before either lender can begin to recover their loan amount, they would have to ask a court to intervene to determine who has the superior security interest in the property. Nevertheless, by entering into a negative pledge, Bank A gains reassurance that it will always have superior security over your company\u2019s property.<\/p>\n<\/div>\n\n\n\n In practice, when you obtain a loan, the bank will gain a security interest in your company\u2019s property in the present and the future. Therefore, the negative pledge applies to all your company\u2019s property unless there are \u201ccarve-outs\u201d.<\/p>\n\n\n\n From a practical standpoint, a bank will seek to secure as much of your company\u2019s property as possible. The language of the security agreement will therefore seek to secure all of your company\u2019s assets. However, there are circumstances where your business will not be able to function if the bank takes security over certain assets. <\/p>\n\n\n\n For this reason, carve-outs seek to exclude specified assets from falling under the secured property. For instance, another lender may have already obtained security in some of your company\u2019s property. To avoid a situation where the security interests conflict, the security interest of the second lender would exclude the property secured by the first. <\/p>\n\n\n\n Some examples of property that lenders commonly carve out of negative pledges include:<\/p>\n\n\n\nNegative Pledges<\/h2>\n\n\n\n
Carve-Outs <\/h2>\n\n\n\n
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\n Due Diligence Guide For Purchasing a UK Business<\/div>\n
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