Company Law Corporate Finance Ii Negative Pledge Clasues, Set Offs, Charges Notes

CORP FINANCE 2 - SECURITY DEVICES, REGISTRATION OF CHARGES, RECEIVERS • • • Continuation of corporate finance Chapters 19-22 in Keane, 19-21 in Courtney - accessible via Brightspace. The focus is security devices. S 412(8) of the companies act 2014.Defines negative pledge insofar as registration of charges Is concerned: SECURITY DEVICES: • Negative pledge clauses: - they do not create a real security, are mere devices, they do not secure an interest over an asset to a lender. - Rather, they are a contractual promise by the company to refrain from creating any other securities/ encumbrances over company property - Pledges not to rather than pledges to. - Promise not to create any securities equal to or better than the security it is giving the chargee - It is to preserve assets so that the security of the company remains healthy. Secure against depletion to the effect that the lender will not be paid back whatever security they provide. Bank A will promise to lend me 100k if I create a NPC and pledge not to create any other securities over that 100k. - Breach - liable for breach of contract (provides no great remedy if insolvent) - They can be stand-alone/ bare: pledge not to encumber its assets or to give any security. - They can be attached to a real security: pledges that the lenders security will rank top of the pile insofar as this is possible. Salthill Properties LTD (2006) IESC 35 Mortgage was created over land owned by company. Question was whether a lease given over the land was in breach of a negative pledge clause. The company presumably promised not to create any securities over the land in return for a loan. Sc:Breach was unnoticed by the parties and shouldn't have been on notice (the mortgagor mustve been equity's darling), thus the clause was ineffective but:Would've amounted to a breach NPCS & floating chargesStandard when drafting a floating charge in Ireland/ England - some comfort to lender NEGATIVE PLEDGES AND FIXED CHARGES • • • Since negative pledges form part of the restrictive terms of a contract, there is sometimes discrepancy/ uncertainty as to whether the words used in the terms constitute a negative pledge, or create a fixed charge. Negative pledges are promises that you wont deal with assets. Fixed charges are the same. Fixed charges - securities over property or assets that cannot be dealt with without the permission of the chargee. - 'Dealt with' - anything - charged, mortgaged, pledge, sold, disposed of, given away etc. - So one would expect that a certain no. of covenants containing restrictive promises not to deal with assets which may include promises to not create securities - that its difficult to distinguish the two - can be enforced against third parties. Difficulty in distinguishing NCP v fixed charge: Walsh v Bowmaker Concerned a residual floating charge. Fixed charge created over specific assets and a floating charge created over any other of the company's assets. Here, SC had to determine whether this residual floating charge had a negative pledge clause associated with it or if it was in fact a fixed charge due to the restrictive nature. The language in relation to the residual floating charge: 'a floating security but so that the company is not to be at liberty to create any mortgage or charge on its property for the time being in priority to or pari passu with this debenture.' Didn't say 'with this floating charge.' Majority: SCnegative pledge clause on a floating charge minoritylanguage renders it fixed charge. The Russell Cooke Trust Company Ltd v Elliott 2007 EWHC 1443 Chlanguage crossed the line. EFFECT OF A BREACH OF NPC Re Salthill Properties Ltd 2006 IESC 35 - NPC in a mortgage Welsh v Bowmaker Ireland Ltd 1980 IR 251 - NPC in a floating chargeboth say if it is contained in a contract, failure to observe is a breach of the contract privity of contract - the person who is breaching (company) is liable to the lender - not very promising as often insolvent.

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