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LE
HANDBOOK
Index
Chapter I
-Aspects of Documentation, etc.
Page Nos. : 4
16
Q1 : Why is documentation required?
Q2 : What is defective documentation?
Q3: Who is an executant of a document?
Q4 : What is to be noted at the time of execution
of lending documentation?
Q5 : What are the points to be noted when document is executed by a constituted
attorney/power of attorney holder?
Q6 : Who can be a “borrower”?
Q7 : Is borrowing by minors not valid?
Q8 : Queries relating to partnership firms:
(a
) What are some points to be noted in case of lending to a partnership firm?
(b) Can HUF be a partner in a partnership firm and what are the points to be noted in
case of
lending to a partnership firm which claims to have HUF as a partner?
(c) When a comp
any is a partner in a partnership firm, is the company personally liable for
the firm’s debt? Is the company required to file particulars of charge when the
partnership
firm creates charge on the assets of the partnership firm in which a company is a part
ner?
(d) What are the points to be noted when a trust is a partner in a partnership firm?
(e) Should a partnership firm which is providing guarantee on behalf of a borrower be a
registered firm?
Response :
Q9 : Can the existing documents continue in case o
f change in constitution of the borrower
from sole proprietor to partnership firm or a company?
Q10 : Queries relating to HUF:
(a) What are some points to be noted in case of lending to an HUF ?
(b) Can a female be a coparcener ?
Q11 : What are some points
to be noted in case of lending to a company?
Q12 : What are some points to be noted in case of lending to a trust?
Q13 : What are some points to be noted in case of lending to a co
operative society?
Q14 : What are some points to be noted in case of lendi
ng to a society registered under the
Societies Registration Act?
Q15 : What are some points to be noted in case of lending to government bodies?
Q16 : What are some points to be noted in case of lending to “association of persons”?
Q17: Can documents cons
titutional documents, rules & regulations, permissions, etc. in
vernacular language be accepted?
Q18: When is a certificate of the auditors / chartered accountant confirming: (a) that the
borrowing or the availing of the financial assistances under the fac
ility agreement would not
cause any borrowing limit binding on the borrower to be exceeded, and (b) that the
assets to
be mortgaged / charged / pledged as security for the financial assistances, are the
absolute
property of the security provider and are fr
ee from any encumbrance, required?
Q19: Is notarization of financing / security documents (including guarantees) necessary
or
required?
Q20: What is the difference between an Agreement to Lease and a Lease Deed? Is it
advisable to accept lease agreement th
at is not duly stamped and registered as title deed?
Q21: Is the signature of the guarantor/s also required on the sanction letter / credit
arrangement letter / letter of intent?
Q22: Is full signature required to be affixed on each page of a document by t
he authorised
official(s)?
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Q23: Sometimes the manual changes are done only at the end of the page after which
full
signature is affixed. For such change/s is the initial required to be placed against the
change?
Q24: Is a specific Board Resolution in relat
ion to the financial assistances agreed to be
provided by the lenders mandatory? Can a general resolution for borrowing be taken?
Q25: Whether the absence of a common seal on any document(except power of
attorney and
share certificates) shall invalidate s
uch document ?
Q26: When facilities are being taken over from other banks / lenders, what are the
documents
which are required to be taken from such banks / lenders and when?
Q27: On which documents should stamp duty be paid and what is the amount of stamp
duty
to be paid on the documents, etc.?
Chapter II
-Aspects relating to law of
limitation
Page Nos. : 16
17
Q28: What is the object of law of limitation?
Q29: Can the parties to a contract alter / waive period of limitation?
Q30: How can the period
of limitation be extended?
Q31: What are the different periods of limitation?
Q32: What is a balance confirmation letter ?
Q33: What is a letter of acknowledgement of debt (LAD) ?
Chapter III
–
Registration of Charges
created by companies
Page Nos. : 1
8
20
Q34: Why should particulars of charge be registered with the ROC by a company?
Q35: What kind of “charges” are compulsorily required to be registered?
Q36: What are the types of documents which should not be attached to Form 8?
Q37: When can the pa
rticulars of a charge created out of India by a company be registered?
Q38: Are the particulars of modification of charge also required to be registered with the
ROC?
Q39: Is filing of particulars of satisfaction of charge also required under the Companies
Act,
1956?
Q40: Particulars of what kind of charges are not required to be registered with the
concerned
ROC?
Chapter IV
–
Security & ranking of charges
Page Nos. : 20
29
Q41: What are the different types of assets which can be secured to a lender? W
ho is required
to provide such security and in whose favour such security is to be created?
Q42: What are the different forms of creation of security?
Q43: What is mortgage by deposit of title deeds?
Q44: What is legal / English mortgage?
Q45: Is there a r
equirement to carry out due diligence before accepting an immovable
property as security?
Q46: Is there a requirement to take search report from advocates providing details of
charges
on properties / assets to be secured?
Q47: Whether it is permissible to
release the title deeds to the security provider / borrower
before the debt is paid off?
Q48: What are the points to be noted in case Guarantee is provided as security?
Q49: What is the difference between indemnity and guarantee?
Q50: What is a letter of c
omfort?
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Q51: What do the terms “first”, “exclusive”, “second”, “subsequent”, “prior”, / “pari passu”
charge mean? Is there a separate process for creation of security for first charge,
exclusive
charge, etc.?
Q52: What are the points to be noted in case a
leasehold property is to be mortgaged?
Q53: What are check points which need to be ensured prior to creation of security?
Chapter
V
–
list of documents
FOR EXECUTION
OF
FACILITY
AGREEMENT,
DEED
OF
HYPOTHECATION, MORTGAGE DEED, GUARANTEE,
PLEDGE AGREEME
NT
, CREATION OF EQUITABLE
MORTGAGE,
Page Nos. : 29
–
31
CONCLUSION
Page No. : 32
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Ensure that a copy of the letter of intent / sanction letter / credit arrangement letter
iss
ued to the borrower has been returned after being duly accepted by the authorised
signatory/ies (unless specifically approved otherwise by the lenders).
All borrowers
& other parties
have signed the
relevant
documents for financial
assistances. Even thoug
h, according to the Indian Contract Act, 1872, a creditor can,
in the absence of an express agreement to the contrary, call upon any one or more of
the joint debtors to repay the debt, joint and several liability of all the joint borrowers
& other parties
should expressly be established.
Ensure that all relevant documents as prescribed by the lenders are executed by
competent persons only.
Ensure that relevant documents are properly stamped on or before execution thereof.
The request letter / application
duly signed by borrower for availing credit facility is
always treated as a part of documentation. Hence, it must be ensured that these are
filled up properly and unambiguously.
Ensure that all original executed documents are kept in safe custody. In case
any
document is to be executed by the lenders, please ensure that the same is signed by
the authorised official(s) of the lenders prior to putting such documents in the safe
custody.
Documents should generally be executed in the presence of the Branch Man
ager
/official(s) of the lenders or authorized official(s) of the approved representative(s) /
agents(s) of the lenders.
Documents
may be signed on behalf of a
body
corporate :
o
by officials authorised by the Board / Committee of
d
irectors
/ members/
trust
ees
(in this case, the
lenders
will need to acquaint
themselves
with the
constitutional documents to check if the documents on behalf of such
corporates can be executed by officials authorised by the Board or in case
there is a specific manner in which the
documents are to be executed).
Certified true copies of constitutional documents, resolutions, specimen
signature of authorised officials, should be kept on record of the
lenders
–
Please also see the contents of the response to Query 3 below
; or
o
by a constituted attorney, i.e. by an official to whom power of attorney has
been granted by the corporate. Such power of attorney should have been
executed under the common seal of the corporate (in this case too the
lenders
should acquaint itse
l
f with th
e constitutional documents for the purposed
stated above). Certified true copies of constitutional documents and power of
attorney should be however kept on record; or
o
common seal may be affixed in the presence of authorised official/s.
Affixation of comm
on seal will need to be done as per the provisions of
articles of association / constitutional documents; this clause generally
specifies the manner in which common seal is required to be affixed. If the
Articles of Association are silent on this point, th
en the Common Seal of the
company should be affixed only
as per the contents of Table A, Schedule I of
the relevant Appendix of the Companies Act, 1956 should be followed, i.e. the
common seal should be affixed in the presence of two directors and of the
S
ecretary or such other person as the Board may appoint for the purpose
.
Where documents are executed under common seal, the officials of the body
corporate authorized to affix common seal should append the signature(s) just
next to / below / above the comm
on seal. The common seal should not be
affixed on the printed matter. The same should be affixed next to the clause
provided for signing.
To ensure that the Memorandum and Articles of Association / constitutional
documents are the updated version, a lett
er signed by the borrower
& other parties
and
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accompanying the certified true copy should be taken mentioning that it is the latest
and updated version.
Thumb impression of illiterate executant(s) should not be got attested. In case of
executants who are
illiterate/blind/not conversant with English, it must be ensured that
the executant has understood the transaction and the documents being executed. A
separate declaration / confirmation in this behalf is to be recorded as per the
prescribed format. This
is also applicable in case of ‘pardanashin’ ladies (i.e. ladies
living in seclusion, having no social interaction), where special care has to be taken,
including, if required, provision of independent legal advice to such ladies.
In case of sole
proprie
torship and partnership firms, full name of the firm and full
name/s of the sole
proprietor/all partners should be mentioned in the body of the
documents.
Query 5 :
What are the points to be noted when document is executed by a constituted
attorney / pow
er of attorney holder?
Response :
In special cases, where documents are to be executed by an attorney on behalf of the
principal, the original Power of Attorney must be examined to ensure that the same
covers
requisite authority for the purpose of such exe
cution. It is advisable to obtain written
confirmation from the principal at the time of execution of the document/s to the effect
that
such Power of Attorney continues to be in force and is subsisting. Notarisation of power
of
attorney is not mandatory; h
owever in such instances, care should be taken to verify that the
power of attorney has been executed in the presence of at least two witnesses /
executed in
the presence of a consulate (if the document is executed outside India) & that the names
and
resid
ential addresses and signatures of the witnesses are also clearly specified / made in the
power of attorney. A letter should be sent by the Lead Bank / security trustee to the
principal
providing details of the security created as also forwarding copy of
the documents.
Certified
true copy of the Power of Attorney, in favour of persons who have signed on behalf of
the
principal should be compared with the original of such Power of Attorney and
endorsement
of having so compared should be made by the official
of the lenders under (h)is/er signature
and should be kept alongwith the original documents.
Query
6
:
Who can be a “borrower”?
Response :
Any “person” who is competent to contract and is entitled to borrow can be a borrower.
“Persons” would include ind
ividuals, body corporates, partnership firms,
proprietary
concerns.
It should be however noted that a
proprietary
concern
is not a separate legal entity and the
proprietor is personally responsible for all acts done in the name of the concern.
A company
cannot be a sole proprietor.
Lenders should
also
keep in view the
provisions of applicable law before lending to any
person including
restrictions imposed by Reserve Bank of India and Exchange Control
Regulations in force while considering advances to No
n
Resident Indians / foreign nationals /
PIOs.
Query
7
: Is borrowing by minor
s
not valid?
Response :
Borrowing by
minors
is not valid.
However, f
inancial assistances
can be provided to legal / natural guardian
(if empowered
under the court orders)
of a
minor. The point to be carefully noted here is that the lenders
would need to prove that such borrowing by the legal / natural guardian was for the
benefit of
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the minor. Thus lending to a natural guardian / legal guardian of a minor
should be
considered c
arefully.
Query
8
(a)
: What are some points to be noted in case of lending to a partnership firm?
Response :
The number of partners in a partnership firm should not exceed 10 if it is engaged in
banking
business and 20 in other cases.
It should be ens
ured that no partner is lunatic or undischarged insolvent and no other
partnership firm is a partner in the borrower firm
& other parties
. The word "Person" in
section 4 of the Partnership Act, 1932, contemplates only a natural or juridical person.
Hence,
a partnership firm not being a legal
entity
cannot be a partner in another firm.
A minor cannot be a partner in the firm even through his natural / legal guardian, but can
be
admitted to the benefits of a partnership, with the consent of all the partners.
In such cases,
minor’s date of birth/attaining majority should be noted. Upon the minor attaining majority
and if he opts to become a partner, then confirmation of documents is to be obtained
from
such minor with the concurrence of other partners. Partn
ership deed for the reconstituted
firm is also required to be taken on record of the
lenders
.
Certified true c
opy of the current partnership deed duly certified in writing by all the partners
or the authorized partner/s should be kept on record for the pur
pose of verification of details
of partners, details of partnership, etc. It is not necessary to take a “notarized” copy of
partnership deed. It is advisable to carry out searches in the office of Registrar of Firms
to
determine the current status of the p
artnership as also the partners. A certificate from the
firm’s Chartered Accountant may be taken in lieu of such searches; such certificate
should
clearly specify the details of the current partners as also that the partnership deed is
valid and
subsisting
.
Care should be taken whilst lending to
unregistered firms. It should be noted that in case of
an
unregistered firm, the firm will not be able to raise claim of set off or other proceedings to
enforce a right arising under a contract
entered into by it
a
nd if the
lenders
want
s
rights under
contracts as security, then it would be difficult to enforce such security. Also if
receivables
are being taken and if any party fails to pay such receivables, the
unregistered
firm will not be
able to proceed against
the parties who are liable to pay such receivables.
It is also advisable
to procure certified true copy of the partnership deed as also that all the partners sign
the
documents for and on behalf of the partnership firm and also in their personal capacity.
All the partners should sign all documents (including application form) in their personal
capacity also. In case certain partners are proposed to be authorized for the purpose of
signing
of documents in connection with the credit facilities, such auth
ority should be granted to such
partners under a power of attorney.
The partnership deed should also be checked to verify
that
such deed permits delegation of authority.
Unless the partnership deed provides otherwise, the firm automatically dissolves upo
n the
death or retirement of any partner and the surviving partners can act only for winding up
of
the activities of the firm.
When
financial assistances
are
proposed to be
continued to
a
reconstituted firm
(carrying on
business with the same name)
after
proper credit appraisal, a
d
eclaration
from the partners of
the reconstituted firm
should be obtained stating
,
inter alia
,
the fact of the reconstitution
of
the firm
. As a result of death or retirement or insolvency of partner(s) if there is only one
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part
ner surviving, then credit facility cannot be continued to the firm as it stands dissolved.
It
is advisable to enter into fresh documents with the reconstituted firm.
Signature procedur
e
: All partners
should
sign the documents
and it advisable to include
the
following language in the signing
clause
:
“
Mr/Ms
[•]
, in their individual capacity and as
partners of the
[•]
firm”
.
It is advisable to obtain the specified forms under the Partnership Act, 1932 i.e. Form A
(Current list of partners as certified by Reg
istrar) & Form C (Registration certificate) in case
of registered partnerships.
The nomenclature of the form issued by ROF may be different in
certain States. (e.g. in Gujarat, the same is referred to as Form G)
However, if it is not possible to procure
s
uch Forms
, then
the following papers may be
procured
:
a certificate from
chartered accountant should be taken stating that the partnership
firm is valid and providing the names of the partners;
certified true copy of partnership deed
with letter from all
partners stating the names
of the partners
;
certified true
copy of latest IT return.
Alternatively, the list of mutation entries printed on the stamp paper and bearing the seal
of
ROF
may be taken
.
I
n case of change in constitution of the borrower
& oth
er parties
from partnership firm to a
company, suitable undertakings should be taken.
For the purpose of identifying the current partners of a partnership firm, it is suggested
that
certified true copy of extract of register maintained by registrar of fir
ms may be taken to
evidence the list of current partners of the firm.
Query
8
(b) : Can H
indu
U
ndivided
F
amily (HUF)
be a partner in a partnership firm
and what are the points to be noted in case of lending to a partnership firm which
claims to have HUF
as a partner?
Response :
The lenders may be
approached
for financial assistances
by partnerships
which claim
to have
HUFs as partners.
It should be noted that a
n
H
UF cannot be a partner in a partnership firm.
Even two HUFs cannot join to form a partnership
firm.
However, a
n HUF and a partnership
firm can be co
-
borrowers
/security provider
. If an individual has signed a partnership deed as
a Karta of an HUF or on behalf of an HUF, only such individual is to be considered a
partner
in such partnership firm
in
his individual capacity
. Any adul
t members / coparceners who
have signed the partnership deed shall also be considered to be partners of the
partnership
firm in their individual capacity; in such event it should be ensured that the total number
of
partners
do not exceed the permissible limit, which is 20 at present.
If in the event any facility is proposed to be provided to a partnership firm where HUF is
stated to be involved in any manner, then the
lenders
must exercise caution in dealing with
such firms
. It should be noted that the
lenders
will not be able to proceed against the members
/ coparceners and the assets of the HUF; the
lenders
may be able to proceed only against the
Karta / personal assets of the Karta (including his share in HUF property) an
d such of the
members / coparceners (including their personal assets) who have executed the
documents, in
their individual capacity. Thus the
lenders
should identify the individuals who are intended to
be bound (alongwith the other partners) and ensure tha
t the relevant documents are also duly
executed by such individuals in their individual capacity.
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Query
8
(c) : When a company is a partner in a partnership firm, is the company
personally liable for the firm’s debt ? Is the company required to file parti
culars of
charge when the partnership firm creates charge on the assets of the partnership firm
in which a company is a partner?
Response :
Where a company is a partner in a partnership firm, the company, like any other partner,
is
personally liable for th
e firm’s debt. A company can enter into a contract of partnership if it is
empowered by its Memorandum of Association. It may be noted that whenever the
assets of
the partnership firm are charged as security, then the registration of charge with Registra
r of
Companies (ROC) is not required even if a company is a partner.
The authorised persons from the company need to sign the documents on behalf of the
company as a partner.
The memorandum and articles of association of a company should be
checked
to ve
rify if the company can become a partner of a partnership firm
and
certified true
copy of requisite resolutions should be procured in relation to
execution of documents
,
securing of properties of etc.
by the company as a partner
.
The company as a partner
needs to initial / sign only once on the documents. In case
common seal is being affixed on the document then please check and procure certified
true
copy of resolutions authorizing company to affix common seal as per the provisions of its
articles of ass
ociation.
Query
8
(
d
)
:
What are the points to be noted w
hen a trust is a partner in a partnership
firm?
Response :
Credit facilities to a partnership firm, where a Trust is a partner, should normally not be
considered to avoid inherent risk, if any, of
being a party, knowingly or unknowingly, to a
breach of trust by the trustees. It should be ascertained from the trust deed whether the
Trust
can become a partner in a firm.
The authorised persons of the trust need to sign the
documents on behalf of the tr
ust as a partner. The constitutional documents of a trust should
be checked to verify if the trust can become a partner of a partnership firm and certified
true
copy of requisite resolutions should be procured in relation to execution of documents,
securin
g of properties of etc. by the trust as a partner.
Query 8(e) : Should a partnership firm which is providing guarantee on behalf of a
borrower be a registered firm?
Response :
It is advisable that a partnership firm which is providing guarantee for on be
half of a
borrower is a registered firm.
Query
9
: Can the existing documents continue in case of change in constitution of the
borrower
/ other parties
from sole proprietor to partnership firm or a company?
Response :
The existing documents cannot contin
ue. The entire set of documentation should be executed
afresh.
Query
10
(a)
: What are some points to be noted in case of lending to an
HUF
?
Response :
Who is Karta ?
Can a junior coparcener be appointed as manager in the presence of the
“karta”
Karta is t
he senior most coparcenor of the HUF. The senior coparcener can however give up
his rights of management and a junior coparcener can be appointed as manager /karta
with
proper consent of all other coparcenors. A karta has a superior right than other coparc
enors
since he has the power of disposition for causes recognized as just and proper under
Hindu
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Law for the whole family property including interest of the minor members. He / she has
the
implied authority to borrow money and contract debts for family pur
poses on the security of
HUF property.
T
he Karta can bind the HUF when he acts in the ordinary course of family business, but
no
other member can do so unless all the adult members sign the documents.
In order to charge the HUF estate, it is necessary
that all the adult members of the family join
in the execution of the documents or give their specific written consent for the
documents to
be signed by the Karta prior to the execution of the documents. The powers of the Karta
are
limited and he can bind
the HUF estate only when he has carried out an action that is
necessary or beneficial to the HUF.
When a suit is to be filed against a HUF estate, the burden lies on the
lenders
to prove that the
financial assistances
were taken for the purpose which wa
s beneficial to the HUF.
Application for
financial assistances
and documents including receipts should be signed by
the Karta for and on behalf of the HUF, and by all adult members
/ coparceners
(including the
Karta) in their personal capacity to make them
liable in their individual capacity.
The Supreme Court has held that only a coparcener can be the Karta or manager of a
joint
family. Therefore, a Karta cannot delegate his/her powers of management of an HUF to
a
person who is not a member/coparcener.
Query 10(b) : Can a female be a coparcener ?
Response :
Female as a coparcener
On and from the commencement of the Hindu Succession (Amendment) Act, 2005 in a
joint
Hindu Family governed by Mitakshara law, the daughter of a coparcener shall by birth
becom
e a coparcerner in her own right in the same manner as the son of a coparcerner and
shall have the same rights (including the right to seek partition of the coparcenary
property)
and liabilities in the coparcernary property as the son. However, this amendm
ent is
prospective in effect and therefore, shall not affect or invalidate any disposition or
alienation
including any partition or testamentary disposition of property which had taken place
before
the December 20, 2004. The above mentioned amendment does
not apply to Dayabhaga
HUF. Under Dayabhaga Law the females were treated as coparceners (including the
widows)
and the same position is maintained till date
The rights and liabilities of a female coparcener
Female coparceners have the same rights and lia
bilities as that of a male coparcener. They
cannot deal with HUF properties as no one other than the Karta can deal with the
coparcenary
property and that too only to the limited extent of the interests of the business. In all
other
circumstances the conse
nt of all the other coparceners of the HUF have to be taken. Further
they are liable for the debts of the HUF incurred by the Karta if the same was incurred
for
furthering the interests of the HUF. The extent of their liability is however restricted to th
eir
share in the property.
Females as the manager of HUF
Pursuant to the amendment to the Hindu Succession (Amendment) Act, 2005, the
daughters
of a coparcener can become a coparcener/Karta and therefore can be the managers of
the joint
Hindu family gov
erned by Mitakshara Law.
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Dealing by female coparaceners with the HUF property
Only in situations where the female coparcener is the Karta of the family can she deal
with
coparcenery property, and that too to the limited extent of the interest
s of the family property.
Query 1
1
: What are some points to be noted in case of lending to a company?
Response :
The company’s Memorandum and Articles of Association (updated and certified true
copy)
should be
procured and
scrutinized to check whether t
he company has the power to borrow
monies and also charge its assets. It should be ensured that there are no "restrictive
clauses"
in this respect. The Articles of Association of the company should be scrutinized to
ascertain
the mode of exercising the bor
rowing powers and executing documents. Further, it must be
ensured that the purpose for which credit facility is sought is consistent with the objects
of the
company.
In addition to the prescribed set of duly executed documents, the following should also
be
furnished :
Certified true copy
of the Resolution of its Board of Directors, duly certified by the Chairman
of the meeting /any Director / Company Secretary. It should be ensured that the
company has
passed the resolution to borrow at a duly convened m
eeting of the Board of Directors and not
by way of a circular resolution. For operational convenience, the Board may delegate the
borrowing function to a Committee of Directors in which case the certified true copy of
resolution passed by the Committee of
Directors may be accepted along with the resolution of
the Board delegating such function.
Certificate from the statutory auditor or Chartered Accountant of the company or a
certificate
from the Company Secretary, certifying that the company is entitled
to draw the amount of
the
lenders
financial assistance must be obtained in case the resolution authorizing borrowing
does not contain specific approval of the
lenders’
assistance
s
.
Certified true copy of resolutions passed under Section 293(1)(d) and Sect
ion 293(1)(a) of the
Companies Act, 1956 should be obtained from the company, wherever applicable. The
aforesaid requirements are applicable only to public limited companies and private
companies which are subsidiaries of public companies.
The provisions o
f S. 293 of the
Companies Act, 1956 are not applicable for “temporary loans obtained from the
company’s
bankers in the ordinary course of business”
–
“temporary loans” means loans repayable on
demand or within six months from the date of the loan such as sh
ort term, cash credit
arrangements, discounting of bills and issue of other short term loans of a seasonal
character
but does not include loans raised for the purpose of financing expenditure of a capital
nature.
Contingent liabilities like amounts outstan
ding on a deferred payment agreement or under
guarantee issued by the bankers for such deferred payment instalments or in respect of
LCs
established by the company’s bankers are not borrowings.
In case a public company (or a private company which is a sub
sidiary of a public company) is
providing a guarantee/other security
(for financial assistance to borrower)
, the company is
required to comply with the provisions of S. 372 A of the Companies Act, 1956. The
aforesaid provisions would not be applicable to
a guarantee/security provided by a company
to its wholly owned subsidiary, or by a banking company. In case the aforesaid
provisions are
not applicable, please obtain a certificate from the company’s statutory auditors / from a
chartered accountant that th
e provisions of the aforesaid section is not applicable and the
reasons for non applicability.
For further details on applicability of S. 372 A of the
Companies Act, 1956 and exemptions thereunder, please refer to such Section in the
Companies Act, 1956.
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The extract of resolutions should be certified by the company secretary or the chairman
or a
director who has not been authorized to sign the documents. If a company does not
have a
whole time Company Secretary, the board resolution can be certified by pe
rson(s) authorized
under Section 2(3) of The Companies (Appointment And Qualifications Of Secretary)
Rules,
1988.
Query 1
2
: What are some points to be noted in case of lending to a trust?
Response :
In case of advances
lending
to a Trust, documents shoul
d be executed as per the resolution
passed by such Trust in terms of the rules/provisions governing the respective
institutions/bodies. Byelaws / constitutional documents of such Trusts should permit
borrowings for specified purposes and creation of secur
ity.
In case of Public Trusts, Charity Commissioner’s permission may be required for
borrowings/creation of security. It should be noted that the Trustees are themselves
owners
of the properties of the Trust in name only, as they are holding the same for
the benefit of
others. As such, the Trustees’ powers and authorities are totally restricted by the
provisions
of the Trust Deed/Agreement. The Trustees cannot delegate their functions, even to a
co
trustee, unless the Deed/Agreement provides for the same
; the delegation is in the regular
course of business, or is absolutely necessary; or if the beneficiary of the Trust, being
competent to contract, consents to the same. In the absence of the above, it is advisable
to
have all Trustees sign the documents.
Query 1
3
: What are some points to be noted in case of lending to a co
operative
society?
Response :
A Co
operative Society may be registered under the statewise enactments governing
cooperative societies, or under the Multi
State cooperative Societies Ac
t, 2002. The extent
and manner of exercise of the borrowing powers of a society may be found in the
respective
Acts, Rules/Regulations thereunder, or in the Byelaws of
such S
ociety. The purpose of the
financial
assistance should also fall within the obje
cts of the
Society
. In several cases,
permission of the relevant Registrar of Cooperative Societies may be required for the
availing
of the assistance/creation of security. The documents would require to be executed in
accordance with the resolution(s) pas
sed by the governing body/managing committee
members of the
Society
.
The documents would be required to be executed with proper
authority.
Query 1
4
: What are some points to be noted in case of lending to a society registered
under the Societies Registra
tion Act?
Response :
A society
registered
under the Societies Registration Act, 1960, is established for the
promotion of literature, science or fine arts, or for the diffusion of useful knowledge or of
political education or for charitable purposes. Such
a society is governed by a governing
body (governing council, directors, committee, trustees or other body). In most states,
the
Memorandum of Association and rules and regulations governing the functioning of the
Society
are required to be filed with the
Inspector General of Registration/Registrar of
Societies/Charity Commissioner. However, such registration may not be compulsory.
The
extent and manner of exercise of the borrowing powers of a society may be found in the
Memorandum of Association of the s
ociety. The purpose of the assistance should also fall
within the objects of the society. The documents would be required to be executed with
proper authority.
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Query 20 :
What is the difference between an Agreement to Lease and a Lease Deed?
Is
it advisable to
accept l
ease agreement that is not duly stamped and registered
as
title
deed
?
Response :
An agreement to lease, is merely an agreement to lease in future i.e., it does not create
the
lease but merely provides confirmation to give the property on lease. Whereas a
lease deed is
a document of title, whereunder the lease is created and granted. Sometimes an
agreement to
lease automatically converts to lease agreement on happening of certain events.
It is not
advisable to
accept a lease agreement that is not duly sta
mped and registered
as a title deed
.
Query 2
1
: Is the signature of the guarantor/s also required on the sanction letter /
credit arrangement letter / letter of intent?
Response :
No, only the borrower’s signatures are required on the
sanction letter / cr
edit arrangement
letter / letter of intent
, unless otherwise specified by
the lenders
.
Query 2
2
: Is full signature required to be affixed on each page of a document by the
authorised official(s)?
Response :
Only initials would suffice
at the bottom of e
ach
page of a document
and against each change
/ inscription / deletion / overwritings / alterationsmade in the document
. Full signature of the
authorised official(s) / signatories should be made on the last page of the document.
In case an executant is
signing in more than one capacity, a single initial and full signature by
such executant would suffice provided such capacities are clearly stated in the
document.
The rubber stamp of the firm / company / concern need not be affixed on the documents
if th
e
name of the person(s) who is signing the document and the name of the business / firm /
concern / company is mentioned clearly in the signing clause.
In case there are too many changes on a particular place a bracket may be drawn in the
margin, against
the entire portion containing the changes and initials can be obtained once
against such a bracket.
Query 23 : Is affixing of
a rubber stamp of the
executant necessary ?
Response :
Affixation of rubber stamp is not necessary under law.
Following should
however be noted :
For partnership firms
& proprietory concern
: In case there is language in the document
capturing the obligations of the partners both in their individual capacity and as partners
of
the firm, then affixing a rubber stamp is not require
d. Even if such rubber stamp is affixed, it
does not affect
the
interest
of the lenders
on account of the aforesaid reason. Thus it should be
ensured that the document contains suitable language to the effect that “the partners are
liable
to the
lenders
,b
oth in their individual capacity as also as partners of the firm”.
Query 24 :
Is a specific Board Resolution
in relation to the financial assistances agreed
to be provided by the lenders
mandatory? Can a general resolution
for borrowing
be
taken?
Response
:
A general resolution and not specifically in relation to the financial assistances agreed to
be
provided by the lenders can be accepted provided such
general resolution cover
s
aspects
provided for in the format
of the Board Resolution
and
also
authorise
s
the
body corporate
to
borrow
financial assistances
from
the lenders
on terms to be specified by
the lenders
. Certain
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officials should
also
be authorised to finalise, settle and approve such terms.
Care should be
taken to ensure (by way of auditor’s cert
ificate) that the amount of the financial assistances
agreed to be provided by the lenders is within the limits specified in such resolution.
Query 25 : Whether the absence of a common seal on any document(except power of
attorney and share certificates)
shall invalidate such document ?
Response :
Failure to affix the common seal on any document
(except power of attorney and share
certificates) by itself will not invalidate such document if the same has been executed
pursuant to and in accordance with
the
authorization / resolution
.
Query 2
6
: When facilities are being taken over from other banks / lenders, what are the
documents which are required to be taken from such banks / lenders and when?
Response :
No due certificate/s and letter/s releasing charg
e should be taken. Title deeds (if agreed to be
placed with the lead bank/security trustee) should also be taken from such banks /
lenders. It
is advisable to take such letters / certificates before disbursing the amount or at least
simultaneously with t
he first disbursement.
Query 27 :
On which documents should stamp duty be paid and
what is the amount of
stamp duty to be paid on the documents, etc.?
Response :
It is essential to know the
nature of
a
document to enable ascertainment of the applicable
st
amp duty.
Quantum of stamp duty will depend on the provisions of the Stamp Act of
various State.
Non
judicial stamp paper should be purchased from reputed stamp vendors either in the
name
of the executant or the
lenders
(if the
lenders are
a party to
s
uch
document). It may be noted
that in some States the stamp papers are required to be used within six months from the
date
of issue thereof.
All documents should be properly stamped on or before execution thereof. An
unstamped or
insufficiently stamped
document will not be admitted in evidence or form the basis of a suit.
The date of the documents should be subsequent to the date of the stamp paper /
franking.
No substance should be typed / inscribed on the face of the stamp.
Where a document is to
be executed at two or more places, following procedure should be
adopted :
a)
The document should be properly stamped at the place where it is first executed
and
the executant(s) at such place. Just below the signature of each executant, the
executant
sh
ould put the date of execution by (h)im/er.
c)
The document should, thereafter, be forwarded to the other place(s) for execution by
the remaining executants. The document should be dated as of the date when the last
executant signs; the authorized offici
al of the
lenders
should sign such document (where
required) on such last date.
d)
If the stamp duty payable for the document at the
any of the other
place
(s)
is more
than that paid at the first place, then
stamp duty
representing the
highest of the
diffe
ren
tial
amount should be paid and the non judicial stamp paper
for the differential amount should be
attached to the
document
;
the signatures of the remaining executants at that place should be
obtained with endorsement as stated below
:
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It is not advisable
to attach
blank
non
judicial stamp papers to documents for payment to
make up the
differential
stamp duty.
Each of the
stamp papers should contain part of the
matter from the document and should be attached to the document; however where it is
not
possibl
e to do so, such stamp papers should be attached to the document with a noting that
“this
stamp paper
(s)
form a part of
<name of document eg. facility agreement, deed of
hypothecation, etc.
, dated the __ day of ___, 20__
>
and the signatures of
all
the exec
utants
should be obtained on such stamp papers.
CHAPTER
II
ASPECTS RELATING TO LAW OF LIMITATION
Query 28 : What is the object of law of limitation?
Response :
The object of the law of limitation is to prescribe the period within which existing rights
on
the securities can be enforced in a court of law. However, for exercising rights out of
court,
there is no limitation period, for e.g. right of set off and combining accounts. The law of
limitation does not itself create an obligation or a right to sue
where none existed. It simply
imposes time limit to litigation.
It may be noted that any suit instituted, appeal preferred and application made after the
prescribed period as laid down under the Limitation Act, 1963, is liable to be dismissed.
Query 29
:
Can the parties to a contract alter
/
waive period of limitation?
Response :
The parties cannot, by agreement, express or implied, alter
/ waive
the period of limitation as
laid down in law. It is also not possible for them to waive limitation by agreem
ent.
An
agreement not to raise the plea of limitation in case a suit
/
application
/
appeal is filed
/
made
/
preferred is inoperative and ineffective.
Query 30 : How can the period of limitation be extended?
Response :
Limitation can be extended by the
acts of the parties in any one of the following ways:
Fresh documents:
If the borrower executes a fresh promissory note or a new set of documents etc.
(including for
time barred debt), the limitation period becomes available from the date of the fresh
doc
ument.
Acknowledgement:
Acknowledgement of debt properly executed within the period of limitation extends the
limitation period from the date thereof.
Part Payment:
Part Payment of a debt made before expiry of the prescribed limitation period can also
ext
end
the period of limitation, provided such payment has been authenticated by the borrower,
or by
his duly authorized agent under his signature.
Query 31 : What are the different period
s
of limitation?
Response :
The period of limitation for filing a sui
t for recovery of money under various documents is as
set out under the Limitation Act, 1963.
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Query 32 : What is a balance confirmation letter ?
Response :
Balance Confirmation is a letter wherein borrowers confirm and agree that debit balance
in
thei
r borrowal accounts as on a particular date as appeared in the books of accounts of the
lenders
. Balance confirmation should be obtained from the borrower once in a year as on 31st
March
(as per prescribed formats of the lenders)
.
Query 33 : What is a le
tter of acknowledgement of debt (LAD) ?
Response :
LAD is a letter wherein borrowers/guarantors/security providers confirm execution of
documents and acknowledge debt / correctness of debit balances in respect of the credit
facilities as on a particular da
te as appearing in the books of accounts of the
lenders
. LAD for
all the credit facilities should be obtained (as per prescribed format
s of the lenders
) at the
time of renewal of working capital facilities or after every second year but in any event
before
expiry of the third year from the date of the original documents / date of previous
LAD. Such acknowledgements should be executed by all the borrowers/guarantors/
security
providers under valid authorization, across the revenue (adhesive) stamps in the pr
esence of
the officials of the Bank and should be kept alongwith the set of original documents.
The
LAD should be properly stamped.
CHAPTER
III
REGISTRATION OF CHARGES CREATED BY COMPANIES
Query 34 : Why should particulars of charge be registered with th
e ROC by a
company?
Response :
The system of charge registration is intended to disclose to persons about to deal with or
become creditors of, the company the degree of creditworthiness of the company in so
far as
their position might be affected by the ex
istence of certain debts entitled to be paid in
priority. By virtue of the Companies Act, 1956 every relevant charge created by a
company
is, so far as any security on the company’s property is conferred by the charge, void
against
the liquidator or any cr
editor of the company unless registered with the
ROC
within 30 days
of its creation. The Companies Act, 1956 gives a list of assets, a charge on which must
be
registered. Registration of charges identifies the assets which are subject to the charge
and
ope
rates as constructive notice. It makes the charge effective against each and every
person
including the liquidator.
If a mortgage or charge, which requires registration, is not registered, it does not mean
that
the transaction is altogether void or the de
bt not recoverable. The only consequence is that the
security created becomes void against the liquidator and other creditors.
The omission to register charge does not prejudice any contract or obligation for
repayment
of the money secured by such charge,
and where the charge becomes void for want of
registration, the money secured by it immediately becomes payable.
A subsequent charge in respect of which particulars of charge are registered will have
priority
over a prior charge in respect of which such p
articulars are not registered, even if the
subsequent chargeholder had notice of the prior charge.
Part V of the Companies Act, 1956 consisting of section 124 to 145 deals with the
subject of
registration of ‘Charges’.
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Query 35: What kind of “charges”
are compulsorily required to be registered?
What is
the time period for registration of particulars of charge?
Response :
The following charges are compulsorily required to be registered:
a charge for the purpose of securing any issue of debentures;
a char
ge on uncalled share capital of the company;
a charge (including an equitable or legal mortgage) on any immoveable property,
wherever situate, or any interest therein;
a charge on any book
debts of the company;
a charge, not being a pledge (e.g. an hypoth
ecation), on any moveable property of the
company;
a floating charge** on the undertaking or any property of the company including
stock
in
trade;
a charge on calls made but not paid;
a charge on a ship or any share in a ship;
a charge on goodwill, on a pa
tent or a license under a patent, on a trademark, or on a
copyright or a license under a copy right.
** A floating security is an equitable charge on the assets for the time being of a going
concern. It attaches to the subject charged in the varying condi
tion in which it happens to be
from time to time. An essential term of such charge is that the
security provider
may continue
to use its assets in the ordinary way until the charge is crystallized, when it fastens on
the
underlying assets. The charge, so t
o say, is kept latent and dormant, till it crystallizes by the
happening of some event which fixes the charge, e.g. liquidation
/ bankruptcy / insolvency
of
the
security provider
or the appointment of a receiver for taking possession of the charged
propert
y, or default by the
security provider / borrower
, which would entitle its holder to take
action for the enforcement of the security.
The
particulars of
charges are to be registered in the prescribed format alongwith the
prescribed fee within 30 days afte
r the date of its creation. In case of delay, the Registrar may
allow the charge to be registered within 30 days thereafter on payment of additional fee.
Any
further delay entails filing of petition before the Company Law Board to secure
condonation
of del
ay. Different forms have been prescribed for different charges. (Presently, Form 8 is
required to be filed for creation of charge, other than for debentures. For debentures,
Form 10
is prescribed).
The aforesaid forms are required to be digitally signed
on behalf of the company and the
charge
holder.
Query 36 : What are the types of documents which should not be attached to Form 8?
Response :
It may be noted that the
facility agreement
does not create any charge; it merely records the
agreement of the
borrower in relation to the providing of the financial assistance. Hence, the
same is not to be filed with the forms. In the case of equitable mortgage, there is no
document creating the charge and care should be taken that a copy of the Memorandum
of
En
try or the declaration
is
not
filed with the forms.
Mortgage Deed and Deed of
Hypothecation can be attached to Form 8.
One copy of such forms should be kept alongwith original documents.
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Query 37 : When can the particulars of a charge created out of Ind
ia by a company be
registered?
Response :
In the case of a charge created out of India by a company incorporated in India
on properties
situate outside India, the particulars of charge are to be filed within 30 days after the
date on
which the instrument c
reating or evidencing the charge or a copy thereof could, in due course
of post and if dispatched with due diligence, have been received in India.
Query 38 : Are the particulars of modification of charge also required to be registered
with the ROC?
Respo
nse :
If any term or condition or the extent of operation of any charge registered by the
company
under the Companies Act, 1956 is modified, then particulars of such modification should
be
filed with the concerned
ROC (as per prescribed format of Form 8)
.
The time limit for filing
particulars or modification of charge is the same as for the original charge.
The following are examples of what would constitute ‘modification’ : :
Security created for enhanced limit of credit facility.
Further charge for the
same loan or credit facility by way of additional security on
different property.
Release of a part of security from the operation of the charge.
Inclusion of different type of loan or credit facility within the overall limit (provided
original charge has
not been registered for overall limit as such without giving break
up).
Addition of another creditor as a charge
holder by modifying the original document of
charge, with or without any additional credit limit (provided the original charge was
registered a
s a joint charge and names of all creditors have been mentioned).
Change in chargeable rate of interest (other than Bank rate) (provided the original
forms specified the rate of interest).
Change in the terms relating to the maintenance of margin or in th
e period of
repayment of a loan or any other change in repayment terms (provided these terms are
mentioned in the original forms).
Change in the nature of security in respect of a charge already created (eg. Equitable
mortgage to legal mortgage, hypothecat
ion to pledge)
Handing over title deeds by the mortgagee to another creditor for continuation of
security.
Assignment of a charge
.
Query 39 : Is filing of particulars of satisfaction of charge also required under the
Companies Act, 1956?
Response :
Upon s
atisfaction of debt / charge, Form 17 is required to be filed.
The company
is required to
give intimation to the
ROC
of the payment or satisfaction in full
of any charge, within 30 days from the date of such payment or satisfaction in the
prescribed
format
. Forms 17 are required to be filed for satisfaction of charge.
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Query 40 : Particulars of what kind of charges are not required to be registered with
the concerned ROC?
Response :
A charge in the nature of pledge, say, on goods, shares, Government se
curities held by a
company does not require registration.
Where a negotiable instrument has been given to secure the payment of any book debts
of a
company, the deposit of the instrument for the purpose of securing an advance to the
company is not conside
red, for the purpose of the Companies Act, 1956, as a charge on those
book
debts.
CHAPTER
IV
SECURITY
& RANKING OF CHARGES
Query 41 : What are the different types of security which
are
generally stipulated by the
lenders?
Who is required to provide suc
h security and in whose favour such security is
to be created?
Response :
Generally s
tipulate
d
security
-Charge on m
oveable fixed assets / properties
either all or assets situate in particular
location
Charge on c
urrent assets
Charge
Specific equipmen
t or machinery
Mortgage on i
mmoveable fixed assets / properties
either all or assets situate in
particular location
Guarantee
Letter of comfort
by a third party
Pledge / hypothecation of s
hares, units of mutual funds, insurance policies
Mortgage / charge
/ assignment by way of security over / of r
ights under project
documents
Charge on receivables, bank accounts
Assignment by way of security of t
rade
m
ark /
b
rand names / goodwill
Mortgage of a ship
Lien / pledge on/of Term
Deposits
Such security may be r
equired to be provided by either the borrower or third party or both.
The lenders may require the security to be created either in their own favour or the lead
bank
/ institution or a facility agent or a security trustee.
Query 42 : What
are the different
modes / forms of creation of security?
Response :
Hypothecation
:
Moveable assets can be either hypothecated by way of charge
or
mortgaged. Generally, the
mode / form of creation of security on moveable fixed assets, specific machinery, current
assets
,
r
eceivables,
is by way of hypothecation. There is no specific definition of
the term
“hypothecation”.
Section 2(n) of the Securitisation & Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 however defines “hypothecation”.
Th
e charge could be either
in the nature of
a fixed
charge
or a floating charge
. The aforesaid
assets are hypothecated by way of charge under “Deed of Hypothecation”.
A
“
fixed charge
”
is a charge where specific identified moveables are secured in favour o
f the
lender (e.g. specific item of machinery / equipment, vehicle, etc.). In the case of a fixed
charge, the property charged must be described, and the information of the existence of
the
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charge thereon must be specified on the property itself / place w
here the property is installed /
stored / lying, e.g. by affixing a board / notice thereon. The rights available to the
lenders /
hypothecatee
in respect of the charge (e.g. the right to appoint a receiver, enter and inspect,
sell the properties, restrain
the borrower from dealing with the property, etc.) must be
specified in the security documents.
A “floating charge” is an equitable charge on the assets for the time being of a going
concern.
It attaches to the subject charged in the varying condition in
which it happens to be from time
to time. An essential term of such charge is that the security provider may continue to
use its
assets in the ordinary way until the charge is crystallized, when it fastens on the
underlying
assets. The charge, so to say,
is kept latent and dormant, till it crystallizes by the happening of
some event which fixes the charge, e.g. liquidation / bankruptcy / insolvency of the
security
provider or the appointment of a receiver for taking possession of the charged property,
or
d
efault by the security provider / borrower, which would entitle its holder to take action for
the enforcement of the security
There is no
delivery of the assets / delivery of
possession
of the assets / properties
by the
security provider to the hypothecat
ee (i.e. person in whose favour the security is created).
Pledge
:
Moveable properties / assets can also be pledged.
The ingredients of a pledge are the
delivery of the propert
ies / assets
being pledged to the
pledgee (i.e. person in whose favour
the sec
urity is created)
, with the intention of creating security thereon, coupled with the
authority to deal with or dispose of the said property.
A pledge can be created in respect of any tangible moveable property
–
goods, stocks,
jewelry, etc. In cases whe
re physical delivery of the pledged property is not possible,
constructive delivery can constitute a pledge, e.g. when documents of title to the goods,
such
as warehouse receipts, are duly discharged and handed over to the
pledgee,
or when the
goods are st
ored in a godown, and the keys to the same are handed over to the
pledgee
and
separate independent access is made available to the
pledgee
, so as to ensure that the
pledge
has control of the
pledged assets / securities
.
In case of shares/securities held
in physical form, the deposit of the relevant certificate along
with duly signed blank transfer forms (with endorsement of the concerned Registrar of
Companies, where applicable) will be required
to be made to the pledgee
.
In the case of shares held in
dematerialised form, the procedure stipulated under the
Depositories Act, 1996 must be followed :
Filing of the relevant form by the Pledgor with his Depository Participant (DP) containing
details of the DP account, the shares pledged, the details of the
p
ledgee’s
DP account, etc.
(the duplicate/acknowledgement copy of this form is to be deposited with the
pledgee
)
.
The details are then forwarded by the Pledgor’s DP to the central depository service
(NSDL/CSDL), who seek confirmation from the
pledgee’s
DP
.
Upon the
pledgee’s
DP accepting/confirming the pledge, the shares held in the Pledgor’s DP
account are locked in favour of the
pledgee’s
DP account.
In case of other securities, such as units, etc. for which no certificates are issued and the
same
are not
held in DP accounts, the specific procedure for pledge/creation of charge in each case
would need to be examined
–
e.g. in the case of GOI securities (which are held in ledger
form), the securities are required to be transferred in the name of the
pledgee
; in the case of
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In case of an equitable mortgage, there being no document of mortgage, the question of
registration thereof does not arise.
In case of mortgage by d
eposit of title deeds, all original title deeds must be deposited with
the
mortgagee
. Wherever the original documents of title have been lodged for registration,
copies of such documents as certified by the sub
registrar of assurance, alongwith original
l
odgement receipt and certified true copy of duly acknowledged letter addressed by the
mortgagor to such sub
registrar instructing him to forward the original documents to the
mortgagee
after registration may be accepted.
In cases where the original title
deeds are laminated and there is a definite possibility of the
title deeds been torn / damaged in case the lamination is removed, then laminated title
deeds
can be accepted without removal of the same from the lamination if the empanelled
lawyer
who has g
iven the title / search report to us gives a certificate stating that the documents are
correct as verified from the office of the Sub
Registrar where the documents have been
registered. In addition, a suitable confirmation should be taken separately from
the
mortgagor that the laminated copies are authentic and original.
Certified true copies of the receipts for the payment of property tax for the current period
should be obtained in case of buildings situated within municipal limits. Property taxes
co
nstitute a preferential charge on property. Certified true copies of the receipts for the
payment of all dues relating to property should also be obtained. In case of agricultural
land,
certified true copies of the latest revenue records should be obtaine
d.
Though no instrument is executed in the case of mortgage by deposit of title deeds,
stamp
duty is applicable in certain States on any document or recording, relating to such
mortgage
transaction.
Notice of creation of equitable mortgage
:
A notice of
the creation of equitable mortgage can
be sent
by the
lenders / person holding the charge
to the Talathi/Mamlatdar/City Survey
Officer of the concerned Village/Taluk/City/Area, as the case may be, informing him of
the
creation of equitable mortgage in favo
ur
of such person
and requesting him to record
their
charge on the property mortgaged and a copy of the record of right should be obtained
by the
chargeholder
thereafter and kept
alongwith the relevant mortgage documents.
However, cost
impact may be exami
ned prior to sending of such notices.
Q
uery 44 : What is legal / English mortgage?
Response :
In this type of m
ortgage
, a mortgage deed
is
executed by the mortgagor
. Immoveable and
moveable properties may be covered under such mortgage. In such form of m
ortgage, the
mortgagor conveys the property in the name of the mortgagee i.e. the lenders / their
agent or
trustee, without handing over possession, on the condition that the same would be re
conveyed to the mortgagor on payment of the debt. A legal mortga
ge may be unilateral
(signed only by the mortgagor) or bilateral (signed by both the mortgagor and the bank).
Legal mortgages have to be registered with the sub
registrar of assurances having jurisdiction
over the place where the immoveable property is lo
cated. There are restrictions on creation of
legal mortgage by certain individuals outside specified towns.
In case of legal mortgage too, original title deeds should be handed over by the
mortgagor to
the mortgagee
unless the original title deeds have be
en deposited already with some other
lender.
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Mortgage deeds need to be
stamped as per provisions of the relevant State stamp Act and
registered with the concerned Registrar/ sub
Registrar within a period of 4 months from the
date of the mortgage deed. Reg
istration fee is payable as per the rates prescribed by the
respective States.
Query 4
5
: Is there a requirement to carry out due diligence before accepting an
immovable property as security?
Response :
The property to be mortgaged must be properly inves
tigated through empanelled solicitors
/
advocates and only after the same is certified to be clear, marketable and free from
encumbrances,
mortgage should be
permitted to be
created. The empanelled solicitors
/
advocates are required to investigate the mor
tgagor’s title to the property, including by search
of the relevant land records, and report on the chain of title, transactions
/ encumbrances
/
charges on the property, certificates
/
clearances
/
permissions required (including under
Urban Land (Ceiling
& Regulation) Act, 1976 (ULCRA), wherever applicable), list of title
deeds to be deposited with the
lenders / their agent or trustee
, detailed description of the
property, etc. If any defects are pointed out by the aforesaid solicitors
/
advocates in the
title
report, the same should be rectified and got certified by them.
If mortgage is created pending
such rectification, then a suitable undertaking cum indemnity should be obtained
.
All approvals as may be required for creation of mortgage should be o
btained for creation of
effective mortgage.
Query 46 : Is there a requirement to take search report from advocates providing
details of charges on properties / assets to be secured?
Response :
It is advisable to take a search report from advocates which w
ill provide details of any
encumbrances or interest of any nature on the properties / assets proposed to be
secured for
the financial assistances by the lenders.
Search Report, i.e. searches at the office of Sub
registrar, Registrar of Companies, of a peri
od
not later than 4 months prior to the date of creation of security is acceptable.
Query 47 : Whether it is permissible to release the title deeds to the security provider /
borrower before the debt is paid off?
Response :
The
lenders / their agent or tr
ustee
should not part with the title
deeds to the mortgagor or his
representative during the currency of the mortgage (including mortgage accepted on
behalf of
other creditors)
unless all the debt secured is paid off in full to the satisfaction of all the
lenders
. In case an inspection of the title
deeds is requested by the mortgagor, it may be
permitted under the supervision of the
lenders’ authorised
official.
Query 48 : What are the points to be noted in case Guarantee is provided as security?
Respons
e:
The Guarantee inter alia provides: an irrevocable and unconditional undertaking to pay
on
demand the amounts payable by the Borrower; the guarantor may be treated as the
principal
debtor, which generally gives a lender the choice of proceeding against
the Guarantor without
necessarily having to proceed against the Borrower (say, where the Borrower is in
liquidation). The standard corporate/personal guarantee specified by the
lenders
is a
continuing guarantee, where the guarantor’s liability (both as r
egards period and amount) is
co
terminus with that of the Borrower.
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A guarantor has the right of subrogation, i.e. he is entitled to step into the lender’s shoes
(and
have the benefit of any security/other rights available to the lender) only after paym
ent is
made to the lender. A Guarantor is also termed as surety, and the Indian Contract Act
provides that, in certain situations, a surety is released from his liability
–
e.g. when the
underlying transaction guaranteed by the surety is varied, or when, b
y an act of the lender, the
security/property available upon subrogation is reduced in any manner. The standard
guarantee contains clauses that provide for the guarantor’s consent upfront in such
cases;
however,
it is advisable to obtain the guarantor’s/s
ecurity provider’s consent whenever any
amendment/modification, etc. is made to the facility documents
In case a public company (or a private company which is a subsidiary of a public
company) is
providing a guarantee/other security (for financial assista
nce to borrower), the company is
required to comply with the provisions of S. 372 A of the Companies Act, 1956. The
aforesaid provisions would not be applicable to a guarantee/security provided by a
company
to its wholly owned subsidiary, or by a banking
company. In case the aforesaid provisions are
not applicable, please obtain a certificate from the company’s statutory auditors / from a
chartered accountant that the provisions of the aforesaid section is not applicable and
the
reasons for non applicabili
ty. For further details on applicability of S. 372 A of the
Companies Act, 1956 and exemptions thereunder, please refer to such Section in the
Companies Act, 1956
Query 49 : What is the difference between indemnity and guarantee?
Response :
A guarantee i
nvolves three parties
–
the obligor, the beneficiary and the guarantor. There is
assumed to be a contract between the obligor and the guarantor, pursuant to which the
guarantee is issued. In the case of an indemnity, only two parties are involved
–
the
in
demnifier and the indemnified (e.g. in a contract of insurance), and the obligor, if any,
need
not be aware of the indemnity. A guarantee is usually payable on demand, without there
being any requirement for the beneficiary to prove any loss. A guarantee
is provided as
security against any default by the obligor, and the guarantor may be treated on par with
the
principal debtor if provided in the guarantee. An indemnity is normally against the loss
occasioned to the indemnified party in the transaction.
An indemnifier is not automatically
entitled to the rights of a surety.
Query 50 : What is a letter of comfort?
Response :
A letter of comfort is provided by a third party in respect of the facility provided to the
borrower. The contents of a letter of c
omfort may vary, based on the
understanding/negotiation between the parties. A letter of comfort could amount to being
a
guarantee, an indemnity or otherwise (i.e. in the form of a mere comfort letter wherein no
financial obligations are undertaken by the
third party). Based on the credit comfort that is
required on a case
by
case basis it has to be decided which of the aforesaid functions the
letter of comfort should adopt. It is advisable
to
ascertain
the commercial terms
available as
to which of the abov
e roles the letter of comfort is to play and then
prepare
a letter of comfort
as required.
1.
Letter of comfort in the form of a Guarantee
: If the comfort required from the third party is
in the form of a guarantee and such entity / person is not willing
to execute the guarantee
as
per prescribed
format, subject to necessary approvals being obtained, a letter of comfort may
be
prepared
which would act as an equivalent to a guarantee. Such a letter of comfort has to
be issued by the issuer at the instance
of the principal debtor and has to incorporate a promise
on the part of the issuer of the letter to pay to / make good to
the lenders
the
financial
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assistances
provided
/ agreed to be provided
to the principal debtor upon his default. It may
additionally p
rovide that the liability of the issuer to make payment arises immediately upon
default by the principal debtor.
If a letter of comfort is to provide the same credit comfort as a guarantee and is intended
as a
guarantee, then it is imperative that the co
mpliances necessary under Section 372A of the
Companies Act, 1956 are followed and that the letter of comfort is stamped at the
relevant
duty applicable to a guarantee. Regardless of the same, the issuance of the letter of
comfort is
to be pursuant to a re
solution of the board of directors
/ trustees / members
of the issuer in
case the issuer is a company. Since a board resolution may serve as an indicator of the
intention of the issuer in issuing the letter of comfort, care may be taken to ensure that
the
intention to guarantee the debt of the principal debtor is evident from the resolution.
2.
Letter of comfort in the form of an Indemnity
: A letter of comfort may be
prepared
in the
form of an indemnity if required and in such a situation the issuer of th
e letter would agree to
reimburse the loss caused to the creditor / the bank pursuant to default by the principal
debtor. The obligation of the issuer here is to reimburse the loss and is not a promise to
make
good the debt of the principal debtor upon his
default. A guarantee involves three parties
–
the surety, the creditor (beneficiary) and the debtor. There is assumed to be a contract
between the surety and the debtor, pursuant to which the guarantee is issued. In the
case of
an indemnity, only two par
ties are involved
–
the indemnifier and the indemnified (e.g. in a
contract of insurance), and the debtor, if any, need not be aware of the indemnity.
It may be noted that in the case of a guarantee, the surety’s liability is co
extensive to the
liabili
ty of the principal debtor and the obligation of the surety to the creditor arises
immediately upon default of the principal debtor. This need not be the case in an
indemnity
where the creditor may have to prove that actual loss has occurred before the ind
emnifier
becomes liable to pay the creditor (this may also give rise to an argument that actual
loss can
be averred only once the creditor has exhausted all his remedies against the principal
debtor).
For this reason an indemnity may provide a lesser credi
t comfort than a guarantee.
A letter of comfort in the form of an indemnity would need to be stamped as an indemnity
under the relevant stamping legislation and would also need to be authorised by a
resolution
of the Board of
directors / members / trustee
s
of the issuer if the issuer is a company.
3.
Not a Guarantee / Indemnity but a mere undertaking / comfort
: There could also be letters
of comfort, which do not contemplate any obligations on the issuer in the form of a
guarantee
or an indemnity and wou
ld merely be what they are titled as i.e. ‘letters of comfort’. An
illustration of such a letter of comfort would be where the issuer promises to infuse funds
in
the debtor company to ensure that the amounts due to the creditor are satisfied. This is
seen
to
be purely a "letter of comfort" and not a guarantee / indemnity since the issuer does not
undertake
to takeover
the obligations or make good the
liabilities of the debtor. It provides for
various means by which the issuer may instruct / compel / facilit
ate the debtor making
payments to
the lenders
, in case of default by the debtor.
If thus the comfort required by the
lenders
is merely an assurance that the issuer would
induce the debtor to fulfill his obligations and credit comfort does not mandate iss
uance of a
guarantee, then the letter can be worded such that it does not contemplate the issuer
becoming
answerable for payment of the debt of the principal debtor upon his default. This would
certainly not give the creditor the comfort of a guarantee and
thus a considered decision is to
be arrived at based on the credit comfort that is required.
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It is absolutely essential that wherever the Letter of Comfort contemplates a financial
obligation on the part of the issuer company whether as a indemnity/guar
antee or
undertakings, the issuance / signing of the same be authorised by a resolution of the
board of
directors
/ members / trustees
of the issuer.
Query 51 : What
do the terms “first”, “exclusive”, “second”, “subsequent”, “prior”
,/
“pari passu”
charge
mean
?
Is there a separate process for creation of security for first
charge, exclusive charge, etc.?
Response :
Explanation of the terms
:
A
first
/ prior
charge
means that the person in whose favour mortgage / charge is
created holds charge in priority to
other chargeholders.
An
exclusive charge
means that the person in whose favour mortgage / charge is
created holds charge is only entitled to the charge on the properties / assets secured in
his favour.
A
second / subsequent charge
means that the person in
whose favour mortgage /
charge is created holds charge subsequent to the other chargeholders in whose favour
first charge has been created.
The term “pari passu” means that the chargeholders of the same ranking charge hold
similar rights amongst themselve
s in relation to the secured properties.
Ranking of charges will normally rank in chronological order
–
i.e. the priority of charge is
determined by their priority in time. The ranking of charge between the lenders can vary
as
per the terms agreed to by
each of them; this means that the rights of the lenders vis a vis
between themselves in relation to enforcement proceeds, etc. will depend on the ranking
agreed to by each of them. This priority can be varied by a contract/agreement between
the
chargeholde
rs, by ceding prior charge, or by accepting a subsequent charge. Without such
agreement, a charge created later in time (even if designated as a ‘first charge’) will rank
subsequent to any charge created earlier.
Creation of mortgage or charge on any a
sset by a security provider involves the same
procedure and documentation irrespective of ranking of charge between the lenders /
creditors in whose favour such mortgage / charge is created
.
However, the documents should
mention the ranking of charge.
A
formal letter ceding
first /
prior /
second /
subsequent charge on the assets charged in
favour of the
lenders / their agent or trustee
has to be exchanged
. It is also advisable to enter
into a detailed inter se / pari passu arrangements
as per prescribed
format.
Query 52 : What are the points to be noted in case a leasehold property is to be
mortgaged?
Response :
If a mortgage is sought to be created on a leasehold property, the lease deed must be
carefully
scrutinised for power to the lessee to create
a mortgage thereon, and if the same is permitted
subject to the consent in writing of the lessor, such consent should be obtained. The
consent
should also recognise that a notice period of at least 180 days’ will be provided by the
lessor
to the chargehol
der/s prior to termination of the lease and that a right will be provided to the
chargeholder/s to cure the default.
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It should be ascertained that the balance period of lease is sufficiently long to cover the
repayment period of the financial assistance
s. In case where the properties are on lease from
entities such as MIDC etc., a Tripartite Agreement involving the customer, the lenders /
their
agent or trustee and the Industrial Estate may also be required to be executed.
The security provider should a
lso procure a latest no due certificate from the lessor and
furnish the same to the chargeholder.
The lease deed should also be scrutinized to verify that there are no restrictive or
onerous
clauses affecting th
e interest of the chargeholders.
A mortgage
cannot be created in respect of monthly tenancy of a property or property
occupied on leave and licence basis.
Query 5
3
: What are certain essential requirements which should be
furnished
by the
security provider
prior to creation of security?
Response
:
The security provider should furnish
, in addition to the other requirements as may be
specified by the lenders / their agent or trustee,
the following :
Title report / search report
from an advocate empanelled with the lenders / their agent
or trustee;
R
esolutions (eg. under section 293 of the Companies Act, 1956, board resolutions)
Final details of existing financial assistances and charges created by the security
provider on the assets proposed to be secured in favour of the lenders / their agent or
tru
stee
Letters ceding charge in favour of the lenders / their agent or trustee
Certificate under Section 281(1)(ii) of the Income Tax Act, 1961 for creation of
security on assets as described under such Section
Permission under Urban Land (Ceiling & Regulati
on) Act, 1976 (wherever
applicable) to create mortgage over the properties
Any other permission / letter from concerned authority / lessor / collector /
government as may be necessary for creation of mortgage
All requirements as may be specified in the tit
le report / search report
Query 5
4
:
What are the different modes for release of security
?
Response :
Release of security can be done either on full repayment of the financial assistances /
when
the security coverage is in excess of the requirement / u
pon request by the security provider
and if agreed to by the lenders.
Equitable mortgage / mortgage by deposit of title deeds
–
In case of
equitable mortgage / m
ortgage by deposit of title deeds,
since there is no written
instrument under which the mortga
ge has been created, no instrument is required for release
of such security. A letter communicating such release and return of the title deeds will
suffice. It is advisable to take written acknowledgement of receipt of title deeds whilst
returning the sa
me. Care should also be taken to verify and ensure that all the financial
assistances which are secured by mortgage of the underlying property by ways of
deposit of
title deeds have been repaid prior to release of title deeds.
In case the security provide
r is a company, the satisfaction of charge (vide Form 17) should
be filed with the concerned ROC.
In case partial security is released, then form
8
for
modification of charge should be filed.
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Process for release of security (either partial or full) as lai
d down by each lender should be
adhered to.
Legal / English
mortgage
-In case all the properties secured under the mortgage deed are to be released then
a
reconveyance deed should be executed
by the chargeholder(s) in favour of the mortgagor and
registe
red
with the concerned sub
registrar of assurances.
In case partial properties are to be released, then a deed of partial release should be
executed
by the chargeholder(s) in favour of the mortgagor and registered with the concerned sub
registrar of assu
rances
.
Process for release of security (either partial or full) as laid down by each lender should
be
adhered to.
Hypothecation, pledge, other types of security
–
A letter communicating release of charge / pledge, etc. will suffice.
Process for release
of
security (either partial or full) as laid down by each lender should be adhered to.
CHAPTER V
DOCUMENTS
REQUIRED FOR EXECUTION OF FACILITY AGREEMENT,
DEED OF HYPOTHECATION, MORTGAGE DEED,
EXECUTION OF
GUARANTEE, PLEDGE AGREEMENT
, CREATION OF EQUITABLE
MORTGAGE,
Documents required fOR execution of facility agreement
:
1.
Facility Agreement
&
General Conditions
( a copy of the General Conditions to be
handed over to the Borrower)
2.
Supplemental & Amendatory Agreement (as applicable)
3.
Board Resolution (applicab
le for body corporates)
4.
Certified true copy of constitutional documents, eg. Memorandum and Articles of
Association
5.
Resolution under Section 293(1)(a) of the Companies Act, 1956 (if the Borrower is a
company)
6.
Certificate from statutory auditors / chartered
accountant (acceptable to the Lead
Bank) certifying the limits available for borrowing and the specific consortium term
loan being within such limits
7.
Other approvals if any for borrowing of the consortium term loan
Documents required fOR execution of dee
d of
hypothecation BY THE BORROWER
:
1.
Deed of Hypothecation & Standard Terms as applicable to Deed of Hypothecation
(which is to be handed over to the security provider) OR Supplemental Deed of
Hypothecation
2.
Certified true copy of Board Resolution (applicabl
e for body corporates)
3.
Certified true copy of constitutional documents, eg. Memorandum and Articles of
Association
4.
Resolution under Section 293(1)(a) of the Companies Act, 1956 (if the Borrower is a
company)
5.
Search Report from an empanelled advocate to the
effect that the assets to be secured
are free from encumbrances and in case there are encumbrances, then the details of
such encumbrances to be provided
6.
Letters ceding charge in favour of consortium term lenders
7.
Certificate under Section 281(1)(ii) of the
Income Tax Act, 1961
8.
Undertaking to create further security & POA (if applicable)
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9.
Any other requirements of the consortium term lenders
If the aforesaid requirements have been submitted already at the time of execution of
the
facility agreement and if su
bstantial time gap has not elapsed, then there is no requirement for
re
submitting the same.
The requirements specified in point 2
7 will be required at the time of execution of
supplemental deed of hypothecation in case additional assets are required to
be secured /
modifications are to be made. In case the earlier resolutions, etc. have suitable
provisions for
the above also, then no further requirements are to be complied with.
Documents required fOR execution of mortgage deed
BY THE
BORROWER / THIR
D
PARTY
:
1.
Mortgage Deed & Standard Terms as applicable to Mortgage Deed (which is to be
handed over to the security provider) or Supplemental Mortgage Deed
2.
Certified true copy of Board Resolution (applicable for body corporates)
3.
Certified true copy of cons
titutional documents, eg. Memorandum and Articles of
Association
4.
Resolution under Section 293(1)(a) of the Companies Act, 1956 (if the Borrower is a
company and if the provisions of such section are applicable)
5.
Certified true copy of resolution under Secti
on 372 (A) of the Companies Act, 1956
(if applicable)
6.
Search Report from an empanelled advocate to the effect that the assets to be secured
are free from encumbrances and in case there are encumbrances, then the details of
such encumbrances to be provided
7.
Letters ceding charge in favour of consortium term lenders
8.
Certificate under Section 281(1)(ii) of the Income Tax Act, 1961
9.
Undertaking to create further security & POA (if applicable)
10.
Any other requirements of the consortium term lenders
If the aforesaid
requirements have been submitted already at the time of execution of the
facility agreement and if substantial time gap has not elapsed, then there is no
requirement for
re
submitting the same.
The requirements specified in point 2
8 will be required at
the time of execution of
mortgage deed in case additional assets are required to be secured / modifications are
to be
made. In case the earlier resolutions, etc. have suitable provisions for the above also,
then no
further requirements are to be complied
with.
Documents required fOR CREATION of EQUITABLE MORTGAGE
BY THE
BORROWER /
THIRD
PARTY
:
1.
Declaration
–
to be executed by the security provider
2.
Memorandum of Entry
–
to be recorded by the Lead Bank
3.
Certified true copy of Board Resolution (applicable fo
r body corporates)
4.
Certified true copy of constitutional documents, eg. Memorandum and Articles of
Association
5.
Resolution under Section 293(1)(a) of the Companies Act, 1956 (if the Borrower is a
company and if the provisions of such section are applicable)
6.
Certified true copy of resolution under Section 372 (A) of the Companies Act, 1956
(if applicable)
7.
Search Report from an empanelled advocate to the effect that the assets to be secured
are free from encumbrances and in case there are encumbrances, then th
e details of
such encumbrances to be provided
8.
Letters ceding charge in favour of consortium term lenders
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9.
Certificate under Section 281(1)(ii) of the Income Tax Act, 1961
10.
Undertaking to create further security & POA (if applicable)
11.
Any other requirements of
the consortium term lenders
If the aforesaid requirements have been submitted already at the time of execution of
the
facility agreement and if substantial time gap has not elapsed, then there is no
requirement for
re
submitting the same.
The requirement
s specified in point 3, 4, 5, 6, 7, 8, 9 will be required at the time of execution
of modifications are to be made. In case the earlier resolutions, etc. have suitable
provisions
for the above also, then no further requirements are to be complied with.
D
ocuments required fOR execution of GUARANTEE
:
1.
Guarantee & Standard Terms as applicable to Guarantee (which is to be handed over
to the security provider)
2.
Certified true copy of Board Resolution (applicable for body corporates)
3.
Certified true copy of const
itutional documents, eg. Memorandum and Articles of
Association
4.
Resolution under Section 293(1)(a) of the Companies Act, 1956 (if the Borrower is a
company and if the provisions of such section are applicable)
5.
Certified true copy of resolution under Sectio
n 372 (A) of the Companies Act, 1956
(if applicable)
6.
Undertaking to create further security & POA (if applicable)
7.
Any other requirements of the consortium term lenders
If the aforesaid requirements have been submitted already at the time of execution of t
he
facility agreement and if substantial time gap has not elapsed, then there is no
requirement for
re
submitting the same.
Documents required fOR execution of PLEDGE AGREEMENT
:
1.
Pledge Agreement
2.
Certified true copy of Board Resolution (applicable for bod
y corporates)
3.
Certified true copy of constitutional documents, eg. Memorandum and Articles of
Association
4.
Resolution under Section 293(1)(a) of the Companies Act, 1956 (if the Borrower is a
company and if the provisions of such section are applicable)
5.
Cert
ified true copy of resolution under Section 372 (A) of the Companies Act, 1956
(if applicable)
6.
Search Report from an empanelled advocate to the effect that the assets to be secured
are free from encumbrances and in case there are encumbrances, then the det
ails of
such encumbrances to be provided
7.
Letters ceding charge in favour of consortium term lenders
8.
Certificate under Section 281(1)(ii) of the Income Tax Act, 1961
9.
Undertaking to create further security & POA (if applicable)
10.
Any other requirements of the
consortium term lenders
If the aforesaid requirements have been submitted already at the time of execution of
the
facility agreement and if substantial time gap has not elapsed, then there is no
requirement for
re
submitting the same.
DRAFT FOR DISCUSSION PURPOSES ONLY
August
07
VI
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