An acknowledgment and pledge agreement defines the relationship between the borrower, pledgor and creditor, the former two being parent and subsidiary companies. It is typically entered into in the event of a loan borrowing by the subsidiary. It facilitates the subsidiary to borrow loans and at the same time provides security to the creditor. A collateral is typically securitized in lieu of the loan by the parent company.
What is Acknowledgement and Pledge Agreement?
An acknowledgment and pledge agreement is a legal arrangement between the debtor and creditor wherein the parent company of the borrower acknowledges the loan taken by its subsidiary, its terms and conditions and pledges to repay the loan on becoming due. In order to concretize its intention, the parent company typically pledges a collateral which is of adequate value to securitize the debt. Such a contract may contain three parties: The parent company of the debtor, the creditor, and the collateral agent. Before proceeding with the draft of this agreement, following information should be kept in mind: who are the parties (this is important, as mostly this is a tripartite agreement), which party is the parent and which is the subsidiary, the risk exposure of the loan taken, the asset to be securitised, the value of the collateral and the events which may be characterised as default.
Purpose of Acknowledgement and Pledge Agreement
An acknowledgement and pledge agreement assures the creditor that its loan will be repaid. Its main purpose is to provide a sense of security to the creditor and at the same time facilitate subsidiary companies to avail loans. Creditworthiness and capacity to repay is an important factor in the sanctioning of loans. Where the parent company acknowledges and pledges the repayment of the loan and also provides a collateral for the same, it is easier for the subsidiary to be granted the loan. Moreover, having such an agreement in place also enables the parties to understand their rights and obligations clearly.
Inclusions in Acknowledgement and Pledge Agreement
An acknowledgment and pledge agreement should essentially include the names of the parties, their registered addresses, effective date, etc. Apart from the key terms mentioned below which are specific to the particular agreement, a set of boilerplate clauses such as notice, termination, dispute resolution, etc. should also be included.
Key terms of Acknowledgement and Pledge Agreement
The key terms to be included in this agreement are:
- Acknowledgment: An acknowledgment clause wherein the parent company acknowledges that it has gone through the loan agreement of the subsidiary who is the actual borrower.
- Collateral/Security Interest: The agreement should clearly list the parent company or the pledgor offering security as collateral.
- Right of a creditor to proceed against collateral: This clause should be included in the agreement to protect the creditor.
- Representations and Warranties: Both, the creditor and the parent company/pledgor should represent and warrant certain facts. For example, the pledgor should warrant that the collateral is free from any material litigation.
- Application of collateral: How should the collateral be utilized should be mentioned in the contract.
- Events of default: Certain happenings or occurrences should be labeled as events of default. This should be drafted in simple and lucid language.
Drafting an Acknowledgement and Pledge Agreement
The following guidelines may be followed while drafting this agreement:
- Spell out the relationship between the parties very clearly. It should be explicit who is the actual borrower, who is the parent company pledging the security and who is the creditor.
- While drafting the acknowledgment clause, make sure to acknowledge both the existence of the loan and the terms and conditions governing the same.
- The value of the collateral should be proportional to the debt taken.
- If you are drafting clauses from the pledgor/borrower’s side, then make the events of default clause as narrow as possible.
- The collateral should be clearly defined. There should be no ambiguity. For example, stating that, “Property X is the collateral for this loan”, will not suffice. One must state, the name of the property, the location, the description, the area, the approximate market value, etc.
- Representations and warranties should include all disclaimers which may raise a red flag.
- Standard boilerplate clauses such as a waiver, notices, etc. should also be built into the contract.
Acknowledgement of Pledge Sample Clauses
The following are some of the sample clauses:
- “Acknowledgement: Pledgor hereby acknowledges and agrees that he/she has received a copy of the Loan Agreement (including all amendments thereto) and that it is familiar with the terms and conditions contained therein.”
- “Security Interest/Collateral: As security for the indebtedness as reflected in the Loan Agreement, Pledgor hereby assigns, transfers and pledges to the creditor and grants to the creditor a security interest in, certain property which is (i) specifically listed and identified in Attachment A hereto.”
- Pledgor’s Rrepresentations:
“ The pledgor hereby represents that:
- It holds good and secure title to the collateral.
- The collateral is not subject to any material litigation.
- The collateral is free from all encumbrances and charges.
- The pledgor is pledging the said collateral in compliance with applicable laws.”
The importance of this agreement lies in the fact that it enables the parent company to stand guarantee for its subsidiary. In case of violation, legal action may be resorted to. The dispute resolution clause would outline the various alternatives that may be taken in the event of a breach. An interim injunctive remedy may also be obtained to prevent the collateral from being disposed of. It is advised to list out all possible remedies in the acknowledgment and pledge agreement.
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