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26 Law & Pol'y Int'l Bus. 407 (1994-1995)
Negative Pledge Clauses in International Loan Agreements

handle is hein.journals/geojintl26 and id is 417 raw text is: NEGATIVE PLEDGE CLAUSES IN INTERNATIONAL LOAN AGREEMENTS DEREK AsIEDU-AKROFI* INTRODUCTION Negative pledge clauses (NPCs) are standard provisions in loan instruments which regulate the grant of security interests in a debtor's assets. NPCs may either prohibit borrowers from encumbering their assets through the creation of liens, mortgages or other encumbrances, or require borrowers who encumber their assets to secure a creditor's claim equally and rateably in order not to subordinate the present creditor's claim to those of prior creditors. The purpose of such provi- sions is to preserve the assets and future revenues of borrowers by preventing the assets from being used to secure other loans. As a result of the growing incidence of overdue financial obligations by debtor countries, however, a number of schemes have emerged which threaten to undermine the security function of NPCs in international loan agreements because even though the schemes do not in and of them- selves create security interests in violation of NPCs, they nevertheless have the same practical effect as security devices. These schemes, hereinafter referred to as quasi-security devices, include sale and lease-back agreements, title retention transactions, set-aside provisions, and escrow-type accounts and bailment. The devel- opment of quasi-security devices is significant in that it allows the use of payment arrangements which appear to run counter to NPCs in interna- tional loan agreements. Thus, the issue raised by this development is * Associate Professor of Law, Loyola Law School, Loyola Marymount University, Los Angeles. LL.B. (Hons) (Benin) 1985; LL.M. (British Columbia) 1987; LL.M. (Columbia) 1988; J.S.D. Candidate, submitted in partial fulfillment of the requirements for the degree of Doctor of the Science of Law in the School of Law, Columbia University, New York. Two earlier publications were also submitted in fulfillment of the J.S.D. requirements: A Comparative Analysis of Debt Equity Swap Programs in Five Major Debtor Countries, 12 HASTINGS INT'L & COMP. L. REV. 537 (1991) and Sustaining the Commitment of Sovereign Lenders, 30 COLUM. J. TRANSNAT'L L.I (1992). The author gratefully acknowledges the invaluable and insightful comments of Professors Oscar Schachter, Lori Dam- rosch and William Young of Columbia University School of Law, Columbia University, New York, Professors William G. Coskran, David P. Leonard, Christopher N. May, Therese H. Maynard and Jon H. Sylvester of Loyola Law School, and Francis Sowah, Esq., Law Offices of Francis Sowah, New York, for reading earlier drafts of this manuscript, Arjun Goswami for research assistance, Amy Nakano and Denai Burbank, Faculty Support Services, Loyola Law School for typing several drafts of this manuscript. The author also gratefully acknowledges financial support from Loyola Law School's summer research grant program.

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