The written agreement between a corporation and its bondholders might contain a prohibition against paying dividends in excess of current earnings. This prohibition is an example of a restrictive covenant.
A restrictive covenant is a condition which restricts or limits or prohibits and prevents the actions of someone who is named in an enforceable agreement.
In the bond obligations, restrictive covenants limits the amount which the issuers can pay in accordance with dividends to the investors. Restrictive covenants are common in the real estate deeds and leases, where restrictive covenants restrict how owners and tenants can use any property.
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