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ACCA Applied Skills · Corporate and Business Law (Global) · Loan capital

Orion Ltd has granted a floating charge to a lender. The charge agreement contains a clause stating that the company must not create any later charge ranking equally with or ahead of this charge without the lender's consent (a negative pledge). Orion Ltd then grants a later fixed charge over its factory to a second lender, which knows of the clause. What is the likely effect?

The second lender takes subject to the first lender's priority. A negative pledge in a floating charge protects its ranking against later chargees who have notice of the restriction. A later fixed charge would usually win, but not where the lender knew of the clause.

  1. AThe second lender's fixed charge takes priority over the floating charge despite its knowledge
  2. BThe second lender's charge is void because the company has no power to create it
  3. CThe second lender, having notice of the clause, takes subject to the first lender's floating charge priorityCorrect

Explanation

A negative pledge clause can preserve the priority of the earlier floating charge against a later chargee who has notice of it. Without such knowledge, the later fixed charge would normally rank ahead. Here the second lender knew of the clause, so it cannot claim priority, though the charge is not void.

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