No petition: Overview, definition, and example
What is no petition?
A "no petition" clause in a contract prevents one party from filing a petition or initiating legal action, such as bankruptcy proceedings, against the other party. Typically, this clause is included in agreements involving debt or financial obligations, where one party agrees not to seek legal recourse (like filing for bankruptcy) unless certain conditions are met.
Why is no petition important?
This clause is important because it helps maintain the stability of the agreement and prevents one party from prematurely seeking legal relief or triggering a legal process that could negatively affect the other party, especially in financial or insolvency matters. It ensures that the parties remain bound by the contract and provides both sides with certainty that legal action won't be taken without following the appropriate procedures or reaching a certain point.
Understanding no petition through an example
A company enters into a loan agreement with a lender, and the agreement includes a "no petition" clause that prevents the company from filing for bankruptcy while the loan is still in effect. The clause ensures that the company cannot easily avoid its obligations under the agreement by declaring bankruptcy before the debt is settled, which protects the lender’s interests.
Example of a no petition clause
Here’s how a no petition clause may look like in a contract:
The borrower agrees that, during the term of this agreement, it shall not file, or consent to the filing of, any petition for bankruptcy, insolvency, or reorganization under any applicable law, nor shall it seek or consent to the appointment of a receiver or trustee over its assets, without the prior written consent of the lender.
Conclusion
The "no petition" clause helps ensure that the parties remain committed to fulfilling their contractual obligations, especially in financial agreements. It prevents one party from prematurely resorting to legal actions like bankruptcy and provides both sides with more predictability and protection. If you're entering into a financial agreement, this clause can be a key safeguard to avoid unwanted disruptions.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.