Privileged and Confidential
Mortgage Creation and Security Enforcement
IFMR Capital
June, 2013
Relevance of Security Creation
• Secured loans v. Unsecured loans
• Focus is on debt recovery options in cases where borrower is
unwilling to repay
• Standardised documentation and effective security creation for easy
enforcement
Types of Security
Movable Property
• Hypothecation
• Eg: Vehicles, stock and machinery
• Pledge
• Eg: gold, shares
• Charge
• Eg: fixed or floating charge over current assets
Immovable Property
• Registered simple mortgage
• Equitable mortgage by deposit of title deeds
Relevant Documents
Classification of property
Ownership
• Freehold
• Leasehold
• Private/Govt agency
• Government land
•
Nature of property
• Residential
• Commercial
• Agricultural
Conversion certificate required to change agricultural land to
residential/commercial property
Relevant Documents
•
Title Deeds (sale deed, partition deed, gift deed, settlement deed, etc.)
•
Parent Documents (tracing chain of prior title deed)
•
Patta, Chitta, Adangal, A-register extract, EC
•
Revenue records
•
Agreement to sell, security documents
• Legal title search report is normally taken for the last 13-30 years to verify
chain of prior title deeds
Relevant Documents
Additional requirements for:
• Leasehold properties
– Permission of lessor for sale, mortgage creation
– Conditions of lease to be reviewed and complied with
– Allotment letter, possession letter and conveyance deed
• Builder properties
– Construction agreement
– Tripartite agreement
Valid execution of documents
• Deed v. Contract
• Witnessing and notorisation
• State specific stamp duty and registration charges
• Equitable mortgage – deposit of title deeds, confirmation letter,
MODT to be registered in some states
• Power of Attorney
Enforcement of Security
Unsecured Loans
Secured Loans
•
•
•
•
Summary Suit
Post-dated / Blank cheques
Arbitration
Lok Adalats
• Debt Recovery Tribunal
• SARFAESI Act
• Lok Adalats
SARFAESI
•
The Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002
•
Permits banks and Financial Institutions to directly take possession of
secured assets
•
This can be done 60 days after providing a notice for discharge of liabilities
•
Only involves costs associated directly with recovery and no additional legal
costs
•
The remedy is not available to most NBFCs unless notified by the Central
Government
Post Dated/Blank Cheques
Criminal liability can be imposed for dishonor of a cheque that has
been issued to discharge a subsisting debt or liability under
Section 138 of the Negotiable Instruments Act
Cheque is
dishonored and
returned upon
presentation at the
Bank
Within 30 days of
dishonor, a
demand notice is
sent to the Issuer
seeking payment
of the amount
If the amount is not
paid within 15 days
of Demand Notice,
a criminal
complaint can be
filed within one
month subsequent
to this period
Post Dated/Blank Cheques
•
A legal presumption exists that the cheque was validly issued for a
subsisting debt or liability
•
The case is mandated to be completed within 6 months as far as
feasible
•
Being a criminal case repayment is not directly ensured under this
option, but often acts as an effective deterrent
•
It is advisable to obtain a written undertaking from the issuer
authorizing the lender to fill up details in the signed cheque to effect
payment that is due
•
Cheque should not have been issued merely as a security prior to
the loan disbursement
•
Scalability is an issue with this option
•
Default on ECS also follow similar procedure
Arbitration
•
Arbitration clause to be included in the agreement
•
A third party unbiased arbitrator will decide the case based on the
claims and evidence presented before it
•
More informal and does not require adherence to procedural laws,
making it a simpler and faster process
•
Costs of arbitration are typically high and disproportionate to the
benefits if the claim amounts are small
•
Arbitral award is final and automatically enforceable after 3 months.
•
Dissatisfied parties often seek to set aside the award on grounds of
procedural irregularities and public policy
Thank You