Negative pledge

Negative pledge (담보불제공서약/擔保不提供誓約) is a covenant clause in a contract which prohibits a party to the contract from creating any security interests over certain property specified in the provision.

Negative pledges often appear in security documents, where they operate to prohibit the person who is granting the security interest from creating any other security interests over the same property, which might compete with (or rank pari passu with) the security of the first secured creditor under the security document in which the negative pledge appears. The negative pledge clause is almost universal in modern unsecured commercial loan documents. The purpose is to ensure that a borrower, having taken out an unsecured loan, cannot subsequently take out another loan with a different lender, securing the subsequent loan on the specified assets. If the borrower could do this, the original lender would be disadvantaged because the subsequent lender would have first call on the assets in an event of default.

Exemption
A margin call and other collateral-like grant in the ordinary course of business are exempted from the negative pledge. In this case the ordinary course of business covers usual transactions, customs and practices of a certain business or firm.