The parties to the financing agreement in Poland can agree the ban on the sale of shares which could be a useful way of securing the loan. This is an example of the negative pledge clause which the parties could include in the registered pledge agreement to be signed between the pledgee and the pledgor. The ban on the sale of shares is a provision which is aimed at giving an additional security to the lender. The general rule under Polish civil law is that transferability of shares (or any other assets) cannot be excluded contractually. Contractual ban on selling the shares is an exception to this rule: if the prohibition is agreed in the pledge agreement and entered into the register of pledges, the pledgor will not be allowed to transfer the shares or establish addition security over the shares during the term of the pledge agreement. How does it work in practice and what are the legal implications? 
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  • What is the purpose of the ban on the sale of shares?
  • The negative pledge clause typically ensures that the borrower’s assets or the guarantor’s assets remain unencumbered and available to satisfy the claims from creditors in the event of insolvency.
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  • A negative pledge is a contract provision prohibiting the debtor (a personal debtor or a securing party, e.g. a guarantor) from selling or encumbering specified property assets, like fixed assets or shares. This contractual provision aims to protect creditors by ensuring that debtors can only use unencumbered assets as collateral and that the pledgor will remain to be bound by the provisions of the pledge arrangement.
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  • Often, the ban on the sale of shares is complemented with covenants that restrict the debtor’s ability to take on more unsecured debt. The parties can agree a number of additional provisions.
     
    How the ban on the sale of shares can be established?
  • According to Art 14 of the Registered Pledge Law of 1996, the parties can agree that the owner of the shares (i.e. the pledgor) will not be allowed to transfer the shares or establish addition security over the shares during the term of the pledge agreement. The intended sale or encumbrance of the shares will be valid only if the third party did not know about the prohibition. It is practically impossible to rely of this clause because the share registers are open to the public so any third party can easily check the status quo. Therefore, any attempt to sell the shares by the pledgor is unsuccessful.
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  • The ban on the sale of shares is particularly important in the case of guarantors who want to secure the borrower’s debt with their own shares. In the event of insolvency of the borrower, the lender does not want to look for the owner of the pledged shares and carry out additional investigation. The lender wants to have a binding agreement with the guarantor which will facilitate the enforcement of the claim against the borrower by taking over the pledged shares.
     
    Common usage of a ban on the sale of shares
  • Commonly, a ban on the sale of shares is requested by the lender in the situation in which the guarantor is securing the debt of the company. The lender wants to be sure that nothing will change in his relationship with the guarantor during the existence of the pledge.

  • If the guarantor violates the ban on the sale of shares, the intended sale will be invalid and ineffective. Moreover, the guarantor can be found liable for breach of contract. The appropriate remedy for breach of contract can be either injunction, specific performance or damages.

The contractual prohibition on selling the shares under the Polish registered pledge agreement is very popular in Poland so if you are planning to secure the borrower’s debt – take this solution into account.

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