A customary practice in the credit market makes the provision of
financing for a corporation contingent upon the creation of a
floating charge on all of its assets in favor of the financier. In
most instances, the bond terms relating to the lien also include a
"negative pledge" – a restrictive stipulation that
prohibits a corporation from creating additional liens without
receiving the financier's prior written approval.
The moment that a corporation creates a floating charge
that includes a negative pledge, does that make the corporation a
captive of the financier for the purpose of obtaining additional
financing?
Currently, there is no absolute certainty about the legal
standing of a lien created by a corporation in favor of another
entity that contravenes a negative pledge included in an earlier
floating charge. The Israeli Companies Ordinance does not prohibit
the creation of additional liens in favor of other entities,
despite the existence of a negative
