Q&As

If a company enters into a second debenture without obtaining the consent of the first debenture holder is the second debenture invalid?

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Published on LexisPSL on 21/09/2015

The following Banking & Finance Q&A provides comprehensive and up to date legal information covering:

  • If a company enters into a second debenture without obtaining the consent of the first debenture holder is the second debenture invalid?
  • What is a negative pledge?
  • The position of the second debenture holder
  • The position of the first debenture holder

What is a negative pledge?

A negative pledge is a contractual undertaking which prohibits or restricts the borrower from creating further encumbrances over its assets. In the case of secured lending, negative pledge clauses are primarily intended to ensure, among other things, that the borrower is prevented from incurring excessive liabilities (by restricting the amount of security a borrower can create, the lender can indirectly restrict the amount of debt it can incur). Most secured lenders insert a negative-pledge provision into their documents and it is generally considered to be one of the most important undertakings given by the borrower.

A negative pledge does not give rise to a security interest under English law because it does not give the lender any proprietary rights in the borrower's property. However, one way for a third party to be put on notice of the existence of a negative pledge is by the third party searching the register at Companies House. The terms of any negative pledge are 'required particulars' under section 859D of the Companies Act 2006 (CA 2006) so, if a lender has properly registered security, the terms of any negative pledge should have been included in that registration.

Even if the third party did not conduct the usual search at Companies House before taking competing security, it is arguable that it may have 'constructive notice' of the

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