negative pledge clause in finance agreements

Financiers usually enjoy various security devices for guarantee of the repayment of the principal and interest, among them one which is very prevalent, in particular in unsecured finance, is “negative pledge covenant”, according to which the borrower promises not to encumber his assets in favor of any other creditor. This clause purports to protect the financier, who is unsecured, vis-à-vis other creditors of the borrower, who have priority, upon enforcement of his claim out of the borrower's assets. Although this clause, which has various kinds, is basically binding inter partes, in some types, the so-called “affirmative negative pledges” might lead to security interests. The negative pledge clause is popular in corporate finance and not only the validity of this clause, but also its default remedies –in particular against third party creditors who have gained the security interests in borrower’ assets- would be rather illusory under Iranian law. The definition, legal nature, validity and default remedies of negative pledge clause are among the main issues which are examined elaborately in this article with a comparative study of English and Iranian law.